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Cooper v. First Government Mortgage and Investors Corp.

Whitley v. Rhodes

Maxwell v. Fairbanks

Merriman v. Beneficial





This book has solely been written for the purpose of

providing information only. The author and/or
publisher is not giving advice (not advising) on any
subject, and is particularly not giving legal, or
financial advice to anyone, in any way, shape or form.

This book is presented to make available to those who

may need accurate information on the subjects
covered within. Even though the information has been
carefully researched and assimilated from the best
available sources, the author and/or publisher cannot
and does not guarantee the accuracy or correctness of
the information and or suggestions provided and set
forth herein.

We provide assistance and document preparation for

consumers seeking to gain control of their assets.

We have several programs that will assist people in

regaining their financial freedom.

We do not claim to be legal professionals nor do we

give legal advice. We merely help people understand
what their options are and assist them with document

KMD Enterprises D.B.A

2064 Mineral Spring Avenue, Suite C
North Providence, RI 02911


T.I.L.A. is to be liberally construed in favor of consumers,

with creditors who fail to comply with T.I.L.A. in any respect
becoming liable to consumer regardless of nature of violation
or creditors' intent.

The federal Truth In Lending Act was originally enacted

by Congress in 1968 as a part of the Consumer Protection
Act. The law is designed to protect consumers in credit
transactions by requiring clear disclosure of key terms of the
lending arrangement and all costs. The law was simplified
and reformed as a part the Depository Institutions
Deregulations and Monetary Control Act of 1980.

The Truth in Lending Act is important for Banks and Lenders

involved in consumer credit transactions or consumer

Regulations Z and M

The law has been implemented by the Federal Reserve Board

through two key regulations:

Regulation Z explains how to comply with the consumer

credit parts of the law.

Regulation Z applies to each individual or business that

offers or extends consumer credit if four conditions are met:

1. The credit is offered to consumers.

2. Credit is offered on a regular basis.

3. The credit is subject to a finance charge (i.e. interest) or

must be paid in more than four installments according to a
written agreement.

4. The credit is primarily for personal, family or household


If credit is extended to business, commercial or agricultural

purposes, Regulation Z does not apply.

Regulation M

Includes all the rules for consumer leasing transactions.

Regulation M applies to contracts in the form of a lease
where the use of personal property by a person primarily for
personal, family or household purposes.

The lease period must exceed four months, and the total
contractual obligations must not exceed $25,000, regardless
of whether the lessee has the option to purchase the
property at the end of the lease term.
Other Agencies

In addition to the Federal Reserve Board, other federal

agencies may have regulations for certain special lines of

For example, the Department of Transportation has certain

Truth In Lending Act regulations applicable to airlines. The
Veterans Administration, the Department of Housing and
Urban Development, the Federal Home Loan Bank Board and
the National Credit Union Administration are also involved in
the enforcement of the Truth In Lending Act. The Truth In
Lending Act is designed to reduce confusion among
consumers resulting from the different methods of
computing interest. It does not require creditors to calculate
their credit charges in any particular way. However,
whatever alternative they use, they must disclose certain
basic information so that the consumer can understand
exactly what the credit costs.

Home Mortgages

One of the biggest lending transactions any individual is

likely to enter is borrowing to purchase a home. These
transactions have become more complicated in recent years.
Historically, someone trying to buy a home had very few
options. Often, only a traditional thirty year loan was

Now, loans of various duration and interest rate variations

are available to every home buyer. The Federal Reserve
Board and the Federal Home Loan Bank Board have
published a book entitled "Consumer Handbook on
Adjustable Rate Mortgages " to help consumers understand
the purpose and uses of adjustable rate mortgage loans.
Regulation Z requires that creditors offering adjustable rate
mortgage loans make this booklet, or a similar one, available
to consumers.

You can get a free copy of "Consumer Handbook on

Adjustable Rate Mortgages" at the following website.
(see resources page for the URL to obtain this handbook)



Disclosure is generally required before credit is extended. In

certain cases, it must also be made in periodic billing
statements. Regulation M includes similar rules for disclosing
terms when leasing personal property for personal, family or
household purposes, if the obligations total less than

In general, disclosure is required before any "closed end

credit transaction" is completed. There is an exception where
credit is extended over the telephone or by the mails. In
those cases, a disclosure may be made after the fact.
Disclosure is also required before the first transaction under
an open end account, and again at the time the periodic
billing statement is sent.

The term "closed end credit transaction" is defined by

exclusion. That is, it includes any credit arrangement (either
a consumer loan or credit sale) that does not fall within the
definition of an "open end credit transaction". Open end
credit includes credit arrangements like revolving credit
cards, where the "borrower" (that is the credit card holder)
is not required to pay off the principal amount by any
particular point in time. Rather, the borrower is simply
charged interest periodically and is usually required only to
make some minimum payment.

The term credit sale means a sale in which the seller is the
creditor. That is, the amount of the purchase price is
financed by the seller. This includes any consumer lease,
unless the lease is terminable without penalty at any time by
the consumer, or when:

1. The consumer agrees to pay an amount substantially

equal to, or more than, the total value of the property or
services involved.

2. The consumer has the opportunity to purchase the

property for at least nominal consideration.
Under Regulation Z, disclosure must be made of the
following important credit terms:

Finance Charge - This is perhaps the most important

disclosure made. This is the amount charged to the
consumer for the credit.

Annual Percentage Rate - This is the measure of the cost

of the credit which must be disclosed on a yearly basis. The
method for calculating this rate is determined the underlying

Amount Financed - This the amount that is being borrowed

in a consumer loan transaction, or the amount of the sale
price in a credit sale.

Total of Payments - This includes the total amount of the

periodic payments by the borrower/buyer.

Total Sales Price - This is the total cost of the purchase on

credit, including the down payment and periodic payments.

Evidence of compliance with the Truth In Lending

requirements must be retained for at least two years after
the date of disclosure. Disclosures must be clear and
conspicuous and must appear on a document that the
consumer may keep.
The Truth In Lending Act has other important features. If
you elect to advertise credit terms, the law requires
disclosure of key lending terms. Also, the law entitles the
consumer the right to rescind certain credit transactions
within a short period, such as home equity loans and

The penalties for failure to comply with the Truth In Lending

Act can be substantial. A creditor who violates the disclosure
requirements may be sued for twice the amount of the
finance charge. Costs and attorney's fees may also be
awarded to the consumer.

A lawsuit must be begun by the consumer within a year of

the violation. However, if a creditor sues more than a year
after their violation date, violations of the Truth In Lending
Act can be asserted as a defense.


Purpose of the Truth In Lending Act

Economic stabilization and competition is

strengthened by informed use of credit by consumers.

The Act is in Title I of the Consumer Credit Protection

Act and is implemented by the Federal Reserve Board via
Regulation Z (12 C.F.R. Part 226). The Regulation has effect
and force of federal law.
(see resources page to obtain official regulation)

Scope of truth in lending act

T.I.L.A. applies to:

Each individual or business that offers or extends credit

when four conditions are met:

1. The credit is offered or extended to consumers,

2. The offering or extension of credit is done "regularly"

[extends credit more than 25 times (or more than 5
times for transactions secured by dwelling) per year]

3. The credit is subject to a finance charge or is payable

by written agreement in more than four installments,

4. The credit is primarily for personal, family, or

household purposes.

Also, certain requirements apply to persons who are not

creditors but who provide applications for home equity plans
to consumers.

Truth In Lending Early and Final Regulation Z
Disclosure Requirements

The Truth in Lending Act Title I of the Consumer Credit

Protection Act, is aimed at promoting the informed use of
consumer credit by requiring disclosures about its terms and

T.I.L.A. requires lenders to make certain "material

disclosures" on loans subject to the Real Estate Settlement
Procedures Act (RESPA) within three business days after
their receipt of a written application.

This early disclosure statement is partially based on the

initial information provided by the consumer.

The term ''material disclosures'' means the disclosure, as

required by this subchapter, of the annual percentage rate,
the method of determining the finance charge and the
balance upon which a finance charge will be imposed, the
amount of the finance charge, the amount to be financed,
the total of payments, the number and amount of payments,
the due dates or periods of payments scheduled to repay the
indebtedness, and the disclosures required by section
1639(a) of this title.

A final disclosure statement is provided at the time of

loan closing. The disclosure is required to be in a specific
format and typically include the following information:

1. Name and address of creditor

2. Amount financed
3. Itemization of amount financed (optional, if Good
Faith Estimate is provided)
4. Finance charge
5. Annual percentage rate (APR)
6. Variable rate information
7. Payment schedule
8. Total of payments
9. Demand feature
10. Total sales price
11. Prepayment policy
12. Late payment policy
13. Security interest
14. Insurance requirements
15. Certain security interest charges
16. Contract reference
17. Assumption policy
18. Required deposit information


Regulation Z specifically provides that the ''finance charge''

includes any ''interest'' and ''points'' charged in connection
with a transaction. Therefore, if the intermediary is in fact
acting on behalf of the lender, as is the case where the
intermediary accepts secret compensation from the lender or
acts in the lender's interest to increase the amount paid by
the borrower, all compensation received by the intermediary,
including broker's fees charged to the borrower, are finance

Truth In Lending Act: 3-day cooling off period

In addition to remedies described above, consumers who

enter home equity loans may also have rescission rights.

Under T.I.L.A., a consumer may rescind a consumer credit

transaction involving a non-purchase-money security
interest in the consumer's principal dwelling Within 3
business days if all T.I.L.A. disclosure requirements met, or
During an extended statutory period for T.I.L.A. disclosure
violations such as:

Failure to give adequate notice of right to rescind,

Failure to give adequate T.I.L.A. credit term disclosures.

Rescission voids the security interest in the principal

dwelling. Consumer must have ownership interest in dwelling
that is encumbered by creditor's security interest.

Consumer need not be a signatory to the credit agreement.

T.I.L.A. rescission rights do not apply to business credit
transactions, even if secured by consumer's principal



The right of rescission is a consumer protection law found

within the Truth in Lending Act.


In a credit transaction in which a security interest is or will

be retained or acquired in a consumer's principal dwelling,
each consumer whose ownership is or will be subject to the
security interest has the right to rescind the transaction.

Lenders are required to deliver two copies of the notice of

the right to rescind and one copy of the disclosure statement
to each consumer entitled to rescind.

The notice must be on a separate document that identifies

the rescission period on the transaction and must clearly and
conspicuously disclose the retention or acquisition of a
security interest in the consumer's principal dwelling; the
consumer's right to rescind the transaction; and how the
consumer may exercise the right to rescind with a form for
that purpose, designating the address of the lender's place
of business.
In order to exercise the right to rescind, the consumer must
notify the creditor of the rescission by mail, telegram or
other means of communication.

Notice is considered given when mailed, filed for telegraphic

transmission or sent by other means, when delivered to the
lender's designated place of business.

The consumer may exercise the right to rescind until

midnight of the third business day

1. following consummation of the transaction;

2. delivery of the notice of right to rescind;

3. or delivery of all material disclosures, whichever occurs


When more than one consumer in a transaction has the right

to rescind, the exercise of the right by one consumer shall
be effective for all consumers.

When a consumer rescinds a transaction, the security

interest giving rise to the right of rescission becomes void
and the consumer will no longer be liable for any amount,
including any finance charge.

Within 20 calendar days after receipt of a notice of

rescission, the lender is required to return any money or
property that was given to anyone in connection with the
transaction and must take any action necessary to reflect
the termination of the security interest.

If the lender has delivered any money or property, the

consumer may retain possession until the lender has
complied with the above.

The consumer may modify or waive the right to rescind if the

consumer determines that the extension of credit is needed
to meet a bona fide personal financial emergency.

To modify or waive the right, the consumer must give the

lender a dated written statement that describes the
emergency, specifically modifies or waives the right to
rescind and bears the signature of all of the consumers
entitled to rescind. Printed forms for this purpose are


The right of rescission doesn't apply just to borrowers. All

consumers who have an ownership interest in the property
have the right to rescind.

While other parts of Regulation Z typically focus on the

borrowers, this is one area where it affects those beyond the
applicants, in other words all owners of the home being
pledged on the transaction.



The right of rescission requires lenders to provide certain

"material disclosures" and multiple copies of the right of
rescission notice to EACH owner of the property.

Following proper disclosures, lenders must wait at least

three business days before disbursing loan proceeds.



The three-day right of rescission period begins once the

material disclosures and notice have been given, and lasts
three full business days. Business days are defined by Reg Z
to include all calendar days except Sundays and federal
holidays. Saturday IS considered a business day for
rescission purposes, regardless of whether your offices are

In order to properly complete the Notice of Right to Rescind

form, you need to know how to calculate the rescission
period. Consider the following example.
Assume a closing is set for Thursday, November 15th, 2001,
and that all material disclosures and notices are provided to
the parties at that time. The rescission period would run:

Friday, November 16, 2001;

Saturday, November. 17, 2001, and
Monday, November 19, 2001.
Sunday is not counted since it is not considered a business
day. The rescission period would end at midnight on
November 19, 2001.



Reg Z allows borrowers to waive their rescission rights, but

this exception only applies in very limited circumstances. The
law is protective of the right of rescission, and you should be

Borrowers may waive their rescission rights and receive their

loan proceeds immediately only if they have what is called a
"bona fide personal financial emergency." This means a
financial emergency of the magnitude that waiting an
additional three days will be personally or financially
devastating to the borrower. It might include situations
involving natural disasters such as flooding, or a medical
emergency that requires immediate funds. When this type of
situation does arise, the borrower must provide a written
explanation of his or her circumstances to the financial
institution. This is not a document that you should draft for
the borrower.

Waiving the right of rescission is not a common practice,

mostly because doing it wrong can backfire and create a
rescindable loan, causing all kinds of problems down the



After the right-of-rescission period has expired, the Lender

must feel reasonably certain that the consumer has not
rescinded before the loan proceeds are disbursed.

There are some risks to the Bank in disbursing after the third

The law allows consumers to exercise their rescission rights

by mail, and a rescission is effective when mailed.

Thus, a rescission mailed on the third day after closing is

effective even though the lender may not receive it until the
fourth or fifth day after the closing.

To avoid further delay of the loan proceeds, the bank may

want to obtain a confirmation statement from all the owners
stating that they have not exercised their rescission rights.

Consumers should not sign this confirmation until after the

three day period is over. Otherwise, it may look like they
have improperly waived their rescission rights.


There are serious consequences for failing to follow the

right-of-rescission rules. First, until a lender provides the
material disclosures and the proper Notice of Right to
Rescind, the three-business day rescission period does not
start to run, and the transaction remains rescindable for up
to three years.

And once a consumer rescinds a transaction, the security

interest in the property becomes void and you must
reimburse the consumer for all of the finance charges
collected over the life of the loan.

Most rescission errors are alleged in response to collection

actions or other litigation initiated by the lender.


Consumers may modify or waive right to rescind credit

transaction if extension of credit is needed to meet bona fide
personal financial emergency before end of rescission period.
Consumer must provide creditor with dated written
statement describing emergency,
• Specifically modifying or waiving right, and
• Signed by all consumers entitled to rescind.

Borrower's who want to waiver because foreclosure is

imminent is ineffective because under terms of mortgage,
foreclosure could not occur before two months at time of
waiver and thus, there was no bona fide emergency.

Borrowers may not falsely claim an emergency.

Delay of Performance.

Unless the rescission period has expired and the creditor is

reasonably satisfied that the consumer has not rescinded,
the creditor must not, either directly or through a third
Disburse advances to the consumer,
Begin performing services for the consumer, or
Deliver materials to the consumer.


Prepare cash advance check (or loan check in the case of

open-end credit),
Perfect the security interest and/or
Accrue finance charges,
In the case of open-end credit, prepare to discount or assign
the contract to a third party.



Creditor must wait until he/she is reasonably satisfied

consumer has not rescinded.

May do this by Waiting reasonable time after expiration of

period to allow for mail delivery, or

Obtaining written statement from all eligible consumers that

right not exercised.


When consumer rescinds, the security interest becomes void

and consumer is not liable for any amount, including finance

Within 20 calendar days after receiving notice of rescission,

creditor must return any property or money given to anyone
in connection with the transaction, and take whatever steps
necessary to reflect termination for the security interest.

When creditor meets its obligations, consumer must tender

the money or property to creditor, or if tender not
practicable, its reasonable value.
If creditor fails to take possession of tendered money or
property within 20 days, consumer may keep it without
further obligation.

Court has power to exercise equitable discretion and

condition rescission of a loan upon the return of the loan


Refinancing and Consolidation.

Rescission rights do not apply to refinancing or consolidation

by same creditor of an extension of credit already secured
by consumer's principal dwelling.

Rescission rights do apply to extent new amount exceeds

unpaid balance, any earned unpaid finance charges on
existing debt, and amounts attributed solely to costs of
refinancing or consolidation.

Open-end line of credit secured by home used to pay off loan

not originally secured by home requires complete rescission

Door-to-door sales.

When home solicitation sale is financed with second

mortgage loan, consumer may be entitled to two separate
rights to cancel when the transactions are independent.

When consumer offers to obtain his/her own financing

independent of assistance or referral from seller, sale and
financing are separate transactions.

When there are separate transactions,

FTC Rule (Cooling Off Period for Door-to-Door Sales) -
Requires sellers to give buyers three days in which to cancel
a home solicitation sale, and notice of this cancellation right.
T.I.L.A. requires a three-day rescission period (unless
extended for T.I.L.A. violation).

Seller bound by consumer's timely cancellation regardless of

which party receives notice of cancellation.
For single transactions (seller arranged financing), look to
state home solicitation law to determine whether transaction
still covered by state's home solicitations statute three-day
cooling off period.

When seller finances or arranges financing with second

mortgage, this is considered a single transaction.
When there is a single transaction, T.I.L.A. rescission rights
apply, but not FTC Rule three-day cooling off period.
FTC Rule does not apply to transactions in which there is a
T.I.L.A. right to rescind (i.e., second home mortgage

Therefore, consumer has only T.I.L.A. right to rescind and

not the additional three-day cooling off period rights under
FTC Rule.

But, state cooling off periods may apply even when T.I.L.A.
rescission rights are available.

State home solicitation law may not have exemption like FTC
Rule does.

Three-day right to cancel begins on date contract is

signed (when validity of contract is dependent of
obtaining independent, acceptable financing) and
consumer is given T.I.L.A. disclosures
which includes rescission rights notice.

Seller must give notice of the transaction date, and, of the

deadline for exercising right to cancel.



Creditors are liable for violation of the disclosure

requirements, regardless of whether the consumer was
harmed by the nondisclosure, UNLESS:

The creditor corrects the error within 60 days of discovery

and prior to written suit or written notice from the consumer,
The error is the result of bona fide error. The creditor bears
the burden of proving by a preponderance of the evidence

The violation was unintentional.

The error occurred notwithstanding compliance with

procedures reasonably adapted to avoid such error. (Error of
legal judgment with respect to creditor's T.I.L.A. obligations
not a bona fide error.)



Action may be brought in any U.S. district court or in any

other competent court within one year from the date on
which the violation occurred. This limitation does not apply
when T.I.L.A. violations are asserted as a defense, set-off, or
counterclaim, except as otherwise provided by state law.
Private remedies - applicable to violations of provisions
regarding credit transactions, credit billing, and consumer

Attorneys' fees and court costs for successful enforcement

and rescission actions

Statutory damages:

1. For individual actions, double the correctly

calculated finance charge but not less than $200.00 or
more than $2,000.00 for individual actions.

2. For class actions, an amount allowed by the court

with no required minimum recovery per class
member to a maximum of $500,000 or 1% of the
creditor's net worth, whichever is less.

3. Can be imposed on creditors who fail to comply

with specified T.I.L.A. disclosure requirements,
with the right of rescission, with the provisions
concerning credit cards, or with the fair credit
billing requirements.


The enforcement scheme for banks includes the Federal

Reserve System, the Federal Deposit Insurance Corporation,
and other agencies. The enforcement agency responsible for
creditors not subject to the authority of any specific
enforcement agency is the Federal Trade Commission.

Nine separate agencies currently have enforcement


Enforcement agencies can:

Issue cease and desist orders or hold hearings pursuant to

which creditors are required to adjust debtors' accounts to
ensure that the debtor is not required to pay a finance
charge in excess of the finance charge actually disclosed or
the dollar equivalent of the annual percentage rate actually
disclosed, whichever is lower.

If the FTC determines in a cease and desist proceeding

against a particular individual or firm that a given practice is
"unfair or deceptive," it may proceed against any other
individual or firm for knowingly engaging in the forbidden
practice, even if that entity was not involved in the previous

Criminal penalties - Willful and knowing violations of

T.I.L.A. permit imposition of a fine of $5,000, imprisonment
for up to one year, or both.


A review of the First County National Bank's consumer

compliance program was conducted October 2, 1995, and
included the period between July 1994 (the date of the most
recent regulatory compliance examination) and October 2,
1995. An assessment of the bank's compliance with the
following laws and their respective implementing of these
regulations was performed:

• Community Reinvestment Act (CRA)

• Equal Credit Opportunity Act (ECOA)
• Fair Credit Reporting Act (FCRA)
• Fair Housing Act (FHA)
• Truth-in-Lending Act (T.I.L.A.)
• Real Estate Settlement Procedures Act (RESPA)
• Flood Disaster Protection Act (FDPA)
• Truth-in-Savings Act (TISA)
• Expedited Funds Availability Act (EFAA)
• Electronic Fund Transfers Act (EFTA)
• Bank Secrecy Act (BSA)
• Bank Protection Act (BPA)
• Right to Financial Privacy Act (RFPA)
• Fair Debt Collection Practices Act (FDCPA)
• Credit Practices Rule

The audit was performed by Kirschler Peterson

Kirschler Peterson is a Certified Regulatory Compliance

Manager Kirschler Peterson & Associates provides a full
range of financial institution consulting services.
(see resources page for web address of Kirschler Peterson)



To determine the bank's approach to managing its

compliance program, the most recent compliance
examination report, board of directors meeting minutes,
policies, and procedures were reviewed and the Compliance
Officer interviewed.

The examination report stated that the bank's level of

compliance with consumer laws and regulations was less
than satisfactory. The examination report noted many
violations of the RESPA, TISA, and BSA. Since the
examination, management has taken steps to ensure
corrective action. This review revealed that such actions
have been effective in correcting noted violations.

As stated in the examination report, the review was limited

to approximately half of the applicable consumer laws and
regulations. The scope of this initial review was more broad
and included all applicable consumer laws and regulations.
As further described below, this review revealed substantive
violations of Regulation Z as well as technical violations of
the ECOA, RESPA, TISA, EFAA, and EFTA. To prevent future
similar violations, it is recommended that additional staff
training be conducted and that regular monitoring be
implemented. It is also recommended that policy statements
be adopted by the board and implemented by management
that will provide staff with guidance regarding compliance
with specific consumer laws and regulations.
It is further recommended that the bank establish a
Compliance Committee to oversee daily operations. The
Compliance Officer will chair periodic meetings to ensure
that management receives timely information regarding
regulatory changes as well as recommendations for
implementing such changes. It is recommended that the
committee be comprised of Executive Vice
President/Lending, Executive Vice President/Operations,
Senior Vice President/Security Officer, Assistant Vice
President/Training Officer, Internal Auditor, and a CRA
Officer (preferably the President or a member of senior
management). The Compliance Committee will ensure that
staff receive sufficient training and guidance and that the
bank's compliance status is assessed at least annually.

The following describes the specific findings of, and

recommendations resulting from, the review.


Community Reinvestment Act (CRA)

The bank's CRA Statement, CRA Notice, CRA Public File, and
board of directors meeting minutes were reviewed to assess
the bank's level of compliance with the CRA.

The CRA Statement, CRA Notice, and CRA Public File all
contain the information required by regulation. In addition,
the board of directors reviewed and approved the CRA
Statement at its June 1995 meeting. The board also
regularly discusses the bank's CRA-related activities.

It is recommended that subsequent to the end of 1995 a

self-assessment be conducted that will detail the bank's
compliance with CRA regulations. While not required, it is
recommended that the results of the self-assessment be
provided to the board of directors.

Fair Lending Laws and Regulations

Equal Credit Opportunity Act (ECOA)

Fair Credit Reporting Act (FCRA)
Fair Housing Act (FHA)

To determine the bank's level of compliance with fair lending

laws and regulations, the bank's loan policy, twenty-five (25)
denied loan applications, and fifty (50) approved loans were
reviewed. The bank does not currently operate under formal
policies or procedures concerning compliance with specific
consumer laws or regulations.

The board has adopted and management has implemented

nondiscriminatory lending standards. There are no
recommendations in this regard.

Review of the denied loan applications revealed ten

instances in which the documentation contained in the file
did not support the reason for denial in violation of Section
202.9(b)(2) of Regulation B. It is recommended that lending
staff be instructed to clearly document all reasons for denial.
The denied loan application review also revealed that in
twelve situations, the Adverse Action Notice was not
provided within the time frame required by Section 202.9(a)
of Regulation B. It is recommended that lending staff be
instructed regarding the importance of adhering to these
regulatory time frames.


Fair Lending Laws and Regulations (continued)

Review of the approved loan applications revealed that in

each instance the borrowers were not provided with the
Appraisal Availability Notice required by Section
202.5a(a)(2)(i). To prevent future violations, it is
recommended that management determine whether to
automatically provide customers with a copy of an appraisal
(independent or internal) or to provide customers with the
notice advising them of their rights to obtain a copy of the
appraisal used in connection with their loan application. It is
recommended that this determination be described in formal
procedures that will provide staff guidance.

While not required by regulation, it is recommended that the

board of directors adopt a policy statement concerning
compliance with fair lending laws and regulations that will
assign responsibility and provide for periodic training and
monitoring. In addition, it is recommended that
management develop and implement procedures that will
provide specific staff guidance.

A list of the denied and approved loan applications reviewed

is contained in the Exhibit section of this report.

Lending Laws and Regulations

Truth-in-Lending Act (T.I.L.A.)

Fifteen (15) denied residential mortgage loan applications,

thirty (30) approved residential mortgage loans, the bank's
initial home equity line and credit card disclosures, two
consecutive months of home equity lines statements for five
customers and two consecutive months of credit card
statements for five customers were tested to assess the
bank's compliance with the T.I.L.A. and Regulation Z. The
bank does not currently operate under a formal policy or
specific procedures.

Review of the residential mortgage loans revealed

three instances in which the rescission period was
waived at the borrowers' request. As stated in Section
226.23(e) of Regulation Z, this is permissible only in
financial emergencies. In one situation, the borrower
was going out of town and had bills to pay; another
customer perpetually waived her right to rescind
based on unspecified financial emergencies; and one
couple waived their right to rescind due to Christmas
expenses. Management is reminded that permitting
non-emergency rescission waivers is a substantive
violation and may result in significant financial liability
to the bank. In that regard, management is cautioned
to only permit rescission waivers in extreme
circumstances. To prevent these situations from
occurring in the future, it is strongly recommended
that specific procedures be immediately implemented
and that all lending staff receive training concerning
rescission provisions.


Truth-in-Lending Act (T.I.L.A.) (continued)

The approved residential mortgage loan review also

revealed one instance in which it appears that the loan
was funded during the rescission period in violation of
Section 226.23(c). This is considered a substantive
violation. To prevent future such violations, it is
recommended that lending staff be provided training
concerning rescission provisions.
In addition, there was one instance in which the
finance charge was overstated by an amount that
exceeded regulatory tolerance. Given that this is an
isolated incident, there are no recommendations for

Review of the denied applications revealed one instance in

which the initial Regulation Z disclosure was not provided as
required by Section 226.19(a). Continued monitoring is
recommended to determine whether additional staff training
is necessary.

The bank's home equity line initial disclosure

generally complies with regulatory requirements but
does not disclose when fees are payable to third
parties. It is recommended that this information be
inserted or separately provided to customers. Review
of the credit card application/disclosure revealed that
it does not contain the statement that charges
incurred are due when the periodic statement is
received. It is recommended that this information be
inserted or separately provided to customers.
Review of the home equity line statements revealed that the
statements contain the required information; however,
payments do not appear to be credited on the date they are
received. Specifically, payments listed as being received on a
Friday are not credited until Monday and a payment
submitted four days prior to the due date was not credited
until the due date.

Of the statements reviewed, only one payment, that was

submitted after the due date, was credited when received.
Regulation Z specifically states that payments should be
promptly credited unless the payment does not conform to
the bank's requirements for payment (i.e., account number,
payment stub, etc.). It is recommended that the accounts be
researched to determine whether immediate credit should
have been provided to these customers. If so, the bank may
be required to re-credit the customers during the following
billing cycle as the difference in crediting will affect the
average daily balance that is used to calculate the finance
charge. Following are the accounts requiring research:


Burton 82818

Grant 82825

Tracy 82883


Truth-in-Lending Act (T.I.L.A.) (continued)

Review of the credit card statements revealed that the

statements contain the information required by regulation
and that the average daily balances and finance charges are
accurately calculated. No adverse findings were noted.

While not required by regulation, it is recommended that the

board of directors adopt a policy statement concerning
T.I.L.A./Regulation Z compliance that will assign
responsibility and provide for periodic training and
monitoring. In addition, it is recommended that
management develop and implement procedures that will
provide specific staff guidance.

Real Estate Settlement Procedures Act (RESPA)

To determine the bank's level of compliance with the RESPA

and Regulation X, the OCC examination, five approved
residential mortgage transactions, and five denied residential
mortgage loan applications were reviewed. The bank does
not currently operate under a formal policy or procedures.

The examination report stated that disclosures
required by the RESPA, including the HUD-1
Settlement Statement, the Mortgage Servicing
Transfer Disclosure, the Good Faith Estimate, and the
Special Information Booklet, were not provided or
copies, or evidence of receipt by the customer, were
not maintained in the files.

To prevent future violations of the RESPA, the Executive Vice

President in charge of lending discussed RESPA requirements
with lending staff. In addition, a form has been developed
and implemented to verify that required RESPA disclosures
were provided; customers will sign and date this form.

Review of the five approved residential mortgage

transactions revealed that, with one exception, RESPA
disclosures were provided as required. It is recommended
that continued monitoring of RESPA transactions be
conducted to ensure that corrective action initiated by
management is sufficient.

Review of the five denied residential mortgage loan

applications revealed one instance in which the
mortgage servicing transfer disclosure was not
provided as required by Section 3500.21. It is again
recommended that continued monitoring of RESPA
transactions be conducted to ensure that corrective
action initiated by management is sufficient.


Real Estate Settlement Procedures Act (RESPA)


While not required by regulation, it is recommended that the

board of directors adopt a policy statement concerning
RESPA compliance that will assign responsibility and provide
for periodic training and monitoring. In addition, it is
recommended that management develop and implement
procedures that will provide specific staff guidance.

Flood Disaster Protection Act (FDPA)

The compliance examination and five residential mortgage

loan files were reviewed to assess the bank's compliance
with the FDPA. The bank does not currently operate under a
formal policy or specific procedures.

The examiners noted no exceptions with regard to the bank's

FDPA compliance. The file review also revealed no errors.

It is recommended; however, that the board of directors

adopt a formal policy statement concerning FDPA compliance
that assigns responsibility and provides for periodic training
and monitoring. It is also recommended that management
develop and implement formal procedures that will include
the Standard Flood Hazard Determination form the use of
which is mandatory beginning January 2, 1996.

Credit Practices Rule

Three consumer loans having co-signers were

reviewed to test the bank's compliance with the rule.
The consumer contracts do not contain prohibited
provisions and the appropriate co-signer notice is
contained on the back of the combination note/T.I.L.A.


Savings Laws and Regulations

Truth-in-Savings Act (TISA)

To assess the bank's compliance with the TISA and

Regulation DD, the examination report, bank policy, and
account brochures were reviewed. In addition, periodic
statements for interest bearing accounts held by individuals
were tested regarding the accuracy of the interest paid and
the Annual Percentage Yield (APY) earned.

The bank's current TISA policy reflects general regulatory

requirements but does not provide for periodic training and
testing. In addition, implementing procedures have not been
developed. It is; therefore, recommended that the policy be
amended to provide for training and testing and that
management develop and implement specific procedures
that address Regulation DD compliance.

Review of the account brochure revealed that for the 18-

month (both fixed and variable) and the 30-month IRA
accounts, there are conflicting statements regarding the
withdrawal of interest. Specifically, the brochure states "You
can withdraw interest credited to your account in the term
before maturity of that term without penalty"; then under
transaction limitations, the brochure states "You cannot
withdraw interest from your account before maturity". The
brochure should be revised to correctly reflect whether
interest withdrawals are permitted.

The bank's account brochure states that the bank requires a

social security card and picture identification to open a
checking account. While demand deposit accounts are not
subject, per se, to fair lending rules and regulations, it is
recommended that management consider alternative
identification such as an alien identification card or cards
issued to elderly persons for identification purposes.

The bank's periodic statements contain the information

required by Regulation DD. In addition, the interest paid and
the APY earned are within regulatory tolerance. The periodic
statements contain the "average balance for APY" which
does not appear to correspond to the interest paid or the
APY earned. It is; therefore, recommended that this be
deleted from the periodic statement if possible.



Expedited Funds Availability Act (EFAA)

The bank's policy, procedures, account brochure, and a

sample of eight recently completed hold notices were
reviewed to determine the bank's level of compliance with
the EFAA and Regulation CC.

The bank's policy and procedures generally reflect regulatory

requirements and bank practices; however, it conflicts with
the account brochure regarding the availability of electronic
deposits. The policy/procedures state that such deposits are
available the next day following deposit while the brochure
states that deposits are available the day they are received
by the bank. It is recommended that the bank revise the
policy/procedures to reflect that electronic deposits are
immediately available.

The bank's general policy is to make funds available on the

next business day following deposit; holds are imposed on a
case-by-case basis. The bank's procedures specify how to
complete a hold notice. For customer convenience, it is
recommended that the actual date the funds will be available
be reflected on the hold notice; it will be necessary to revise
the bank's procedures to reflect this change.

Review of a sample of eight recently completed hold notices

revealed that in one instance availability was not provided on
the proper day in violation of the EFAA and Regulation CC. In
addition, there were five instances in which the hold notice
was not correctly completed. Specifically, the name or
address was not completed or the reason for the hold was
listed under the check description. It is recommended that
staff responsible for EFAA/Regulation CC compliance receive
additional training concerning hold notice completion. A list
of the hold notices reviewed is contained in the Exhibit
section of this report.

Electronic Fund Transfers Act (EFTA)

To assess the bank's compliance with the EFTA and

Regulation E, its policy, procedures, account brochure, and
periodic statements were reviewed.

The bank's policy and procedures generally reflect regulatory

requirements and bank practices; however, it is
recommended that the policy/procedures describe who, or
what area of the bank, is responsible for resolving EFT errors
and for communicating with customers concerning the error

The bank's policy/procedures also do not discuss the types of

transfers permitted or transfer limits. It is recommended
that the policy/procedures refer to the bank's account
brochures which reflect this information.


Electronic Fund Transfers Act (EFTA) (continued)

The bank's account brochure states that a customer will only

be liable for the first $50 if a lost or stolen ATM card is
reported to the bank within four days. The disclosure also
states that unauthorized or disputed transfers reflected on
periodic statements must be reported to the bank within 90
days; the bank's policy/procedures states that unauthorized
transfers must be reported within 60 days. The EFTA and
Regulation E state that a lost or stolen ATM card must be
reported within 2 days to limit the customer's liability to $50
and that unauthorized transfers must be reported within 60
days of the first periodic statement. It is recommended that
a label reflecting the proper time frames be developed and
placed over the existing language so that customers are
provided with proper information. It is also recommended
that existing customers be provided a re-disclosure and that
recently-reported errors be researched to determine whether
customers were harmed by the incorrect disclosure.

Review of the bank's periodic statements revealed that they

contain required information. No adverse findings were

Operations Laws and Regulations

Bank Secrecy Act (BSA)

The bank's policy, procedures, most recent regulatory

compliance examination, large cash transaction report,
recent Currency Transaction Reports (CTRs), exemption list,
and Monetary Instruments Log were reviewed to determine
the bank's level of compliance with the BSA and
implementing Treasury Regulations.

The bank's policy was approved by the board at its February

1995 meeting and provides for proper reporting, monitoring,
and training. It also states that the bank's Compliance
Officer also has the responsibility of BSA Officer; this is not

As stated above in the Compliance Management section, it is

recommended that the bank form a Compliance Committee
that will oversee daily operations. The BSA Officer should be
a member of this committee. To ensure adequate controls, it
is recommended that Executive Vice President of Operations,
or a designee, be appointed the position of BSA Officer. The
BSA Officer will ensure prompt and accurate reporting of
cash transactions and will provide daily guidance to staff.
Appointing the Executive Vice President of Operations as
BSA Officer will provide the Compliance Officer and Internal
Auditor with the independence necessary to properly review
or audit the bank's BSA compliance program. Management is
reminded that implementation of the above
recommendations will necessitate revising the bank's current
policy/procedures to reflect the separation of duties.



Bank Secrecy Act (BSA) (continued)

Review of CTRs filed since the compliance examination

revealed that the section regarding the identity of the
individual is now fully completed. The bank has attempted to
obtain the revised CTR form that became effective October
1, 1995 but had not yet received a working copy as of the
date of the review and will continue to file the previous form
until receipt of the revised form. The IRS stated that it is
permissible to use the previous form until the end of 1995;
provided, the bank has made a good faith effort to obtain
the new form.

The bank's exemption list contains the names, addresses,

and tax identification numbers of all correspondent banks.
None of the bank's customers are exempted from CTR
reporting requirements. While the bank's current automated
system easily reports these transactions, the IRS has stated
that exemptions should be used so that the IRS system does
not become overloaded with unnecessary information. As
recommended by the OCC examiners, management should
consider exempting some of its retail customers that
regularly deposit, withdrawal, or exchange in excess of

Review of the monetary instruments log revealed that the

bank continues to collect information that is no longer
required by Treasury Regulations. It is; therefore,
recommended that the Monetary Instruments Log contained
in the Exhibit section of this report be utilized as it complies
with current requirements.

Bank Protection Act (BPA)

To assess the bank's approach to compliance with the BPA,

the board of director meeting minutes, security program,
equipment testing, and training records were reviewed.

At its June 1995 meeting, the board of directors approved

the bank's security program and appointed the bank's
Security Officer. The security program describes opening and
closing procedures, security devices, and robbery
procedures. The program provides for annual training for the
Security Officer and periodic staff training. There are no
recommendations for improvement.

Review of the equipment testing records revealed that

security devices are generally tested monthly and
information regarding the testing is forwarded to the
Security Officer at the main office. It appears; however, that
the First County office has not forwarded such information. It
is recommended that the Security Officer ensure that all
offices promptly report equipment testing and failures to
ensure continued security.


Bank Protection Act (BPA) (continued)

Training records indicate that, with the exception of the

Second County office, the bank's entire staff received
security training in June 1995. It is recommended that the
Second County staff receive security training prior to year

Right to Financial Privacy Act (RFPA)

A recent subpoena from the SEC was reviewed and

management interviewed to determine the bank's level of
compliance with the RFPA. The bank does not currently
operate under a formal policy or procedures.

Review of the SEC subpoena and supporting documentation

revealed that the bank received proper authorization prior to
complying with the SEC information request. Management is
reminded that under the RFPA, the bank may recoup from
the SEC its clerical, copying, and other costs associated with
the information requested.

It is recommended that the board of directors adopt a formal

policy concerning compliance with the RFPA and that
management develop and implement procedures that will
provide staff guidance.

Fair Debt Collection Practices Act (FDCPA)

The bank's loan and collection policy and procedures were

reviewed to determine the bank's approach to compliance
with the FDCPA.

Since the bank does not act as a "debt collector", the FDCPA
does not apply. The bank has; however, adopted and
implemented a "non-harassment" policy and procedures for
handling bank collections. There are no recommendations for


Junk charges.
a. yield spread premiums
b. service release fees



Undisclosed referral fees to mortgage originators

Breach of Fiduciary Duty

(Please see Defining Breach of Fiduciary Duty at the end of
this book)

Failure to disclose the circumstances under which private

mortgage insurance (''PMI'') may be terminated.

Unauthorized servicing charges

Example: The imposition of payoff and recording charges.

Improper ARM adjustments

Underdisclosure of the cost of credit.

Payment of compensation to mortgage brokers and

originators by lenders.

For example: a lender who pays a mortgage broker secret

compensation may face liability for inducing the broker to
breach his fiduciary or contractual duties, fraud, or
commercial bribery.



Truth In Lending Act Program Outline

(Each Mortgage is based on its own merits; your case may

have more steps)

1. Submit mortgage papers and closing documents to

specially trained auditors

2. Auditors review documents to find T.I.L.A. violations

3. Paralegals write accusatory letter to Bank

4. Client sends letter number one to Bank

5. Wait 30 days for Bank to respond

6. Receive Bank's response

7. Client sends response to Paralegals

8. Paralegals write amendment to accusatory letter

9. Client sends letter number two to bank

10. Bank wants to come to bargaining table to make offer

11. Client wants to eliminate the Mortgage and collect fines

12. Bank agrees

13. Current Mortgage is discharged and Client gets

$50,000 in fines and Clear Title




BYLINE: Daniel A. Edelman*; *DANIEL A. EDELMAN is the

founding partner of Edelman & Combs, of Chicago, Illinois, a
firm that represents injured consumers in actions against
banks, mortgage companies, finance companies, insurance
companies, and automobile dealers. Mr. Edelman or his firm
represented the consumer in a number of the cases
discussed in this article.
(see resources page for website address for Edelman &


Borrowers Have Successfully Sued Based on Allegations of

Over-escrowing, Unauthorized Charges and Brokers' Fees,
Improper Private Mortgage Insurance Procedures, and
Incorrectly Adjusted ARMS. The Author Analyzes Such
Lending Practices, and the Litigation They Have Spawned.


This article surveys current trends in litigation brought on

behalf of residential mortgage borrowers against mortgage
originators and servicers.

The following types of litigation are discussed:(i) over-

escrowing; (ii) junk charges; (iii) payment of compensation
to mortgage brokers and originators by lenders; (iv) private
mortgage insurance; (v) unauthorized servicing charges;
and (vi) improper adjustments of interest on adjustable rate
We have omitted discussion of abuses relating to high-
interest and home improvement loans, a subject that would
justify an article in itself.

OVER-ESCROWING In recent years, more than 100 class

actions have been brought against mortgage companies
complaining about excessive escrow deposit requirements.

Requirements that borrowers make periodic deposits to

cover taxes and insurance first became widespread after the
Depression. There were few complaints about them until the
late 1960s, probably because until that time many lenders
used the ''capitalization'' method to handle the borrowers'
funds. Under this method, escrow disbursements were added
to the principal balance of the loan and escrow deposits were
credited in the same manner as principal payments. The
effect of this ''capitalization'' method is to pay interest on
escrow deposits at the note rate, a result that is fair to the
borrower. When borrowers could readily find lenders that
used this method, there was little ground for complaint.

The ''capitalization'' method was almost entirely replaced by

the current system of escrow or impound accounts in the
1960s and 1970s. Under this system, lenders require
borrowers to make monthly deposits on which no interest is
paid. Lenders use the deposits as the equivalent of capital by
placing them in non-interest-bearing accounts at related
banks or at banks that give ''fund credits'' to the lender in
return for custody of the funds. Often, surpluses greatly in
excess of the amounts actually required to make tax and
insurance payments as they came due are required. In
effect, borrowers are required to make compulsory, interest-
free loans to their mortgage companies.

One technique used to increase escrow surpluses is

''individual item analysis.'' This term describes a wide variety
of practices, all of which create a separate hypothetical
escrow account for each item payable with escrow funds. If
there are multiple items payable from the escrow account,
the amount held for item A is ignored when determining
whether there are sufficient funds to pay item B, and
surpluses are required for each item. Thus, large surpluses
can be built up. Individual item analysis is not per se illegal,
but can readily lead to excessive balances.

During the 1970s, a number of lawsuits were filed alleging

that banks had a duty to pay interest on escrow deposits or
conspired to eliminate the ''capitalization'' method. Most
courts held that, in the absence of a statute to the contrary,
there was no obligation to pay interest on escrow deposits.
The only exception was Washington. Following these
decisions, some 14 states enacted statutes requiring the
payment of interest, usually at a very low rate.

Recent attention has focused on excessive escrow deposits.

In 1986, the U.S. District Court for the Northern District of
Illinois first suggested, in Leff v. Olympic Fed. S & L Assn.
that the aggregate balance in the escrow account had to be
examined in order to determine if the amount required to be
deposited was excessive. The opinion was noted by a
number of state attorneys general, who in April 1990 issued
a report finding that many large mortgage servicers were
requiring escrow deposits that were excessive by this
standard. The present wave of over-escrowing cases

Theories that have been upheld in actions challenging

excessive escrow deposit requirements include breach of
contract, state consumer fraud statutes, RICO, restitution,
and violation of the Truth in Lending Act (''T.I.L.A.''). Claims
have also been alleged under section 10 of the Real Estate
Settlement Procedures Act (''RESPA''), which provides that
the maximum permissible surplus is ''one-sixth of the
estimated total amount of such taxes, insurance premiums
and other charges to be paid on dates . . . during the
ensuing twelve-month period.'' However, most courts have
held that there is no private right of action under section 10
of RESPA. Most of the over escrowing lawsuits have been
settled. Refunds in these cases have totaled hundreds of
millions of dollars.

On May 9, 1995, in response to the litigation and complaints

concerning over-escrowing, HUD issued a regulation
implementing section 10 of RESPA. The HUD regulation: 1.
Provides for a maximum two-month cushion, computed on
an aggregate basis (i.e., the mortgage servicer can require
the borrower to put enough money in the escrow account so
that at its lowest point it contains an amount equal to two
months' worth of escrow deposits) Does not displace
contracts if they provide for smaller amounts; and Provides
for a phase-in period, so that mortgage servicers do not
have to fully comply until October 27, 1997.

Meanwhile, beginning in 1990, the industry adopted new

forms of notes and mortgages that allow mortgage servicers
to require escrow surpluses equal to the maximum two-
month surplus permitted by the new regulation. However,
loans written on older forms of note and mortgage, providing
for either no surplus or a one-month surplus, will remain in
effect for many years to come. In recent years, many
mortgage originators attempted to increase their profit
margins by breaking out overhead expenses and passing
them on to the borrower at the closing. Some of these ''junk
charges'' were genuine but represented part of the expense
of conducting a lending business, while others were
completely fictional. By breaking out the charges separately
and excluding them from the finance charge and annual
percentage rate, lenders were able to quote competitive
annual percentage rates while increasing their profits.

Most of these charges fit the standard definition of ''finance

charge'' under T.I.L.A.. A number of pre-1994 judicial and
administrative decisions held that various types of these
charges, such as tax service fees, fees for reviewing loan
documents, fees relating to the assignment of notes and
mortgages, fees for the transportation of documents and
funds in connection with loan closings, fees for closing loans,
fees relating to the filing and recordation of documents that
were not actually paid over to public officials, and the
intangible tax imposed on the business of lending money by
the states of Florida and Georgia, had to be disclosed as part
of the ''finance charge'' under T.I.L.A..

The mortgage industry nevertheless professed great surprise

at the March 1994 decision of the U.S. Court of Appeals for
the Eleventh Circuit in Rodash v. AIB Mtge. Co., holding that
a lender's pass-on of a $ 204.00 Florida intangible tax and a
$22.00 Federal Express fee had to be included in the finance
charge, and that Martha Rodash was entitled to rescind her
mortgage as a result of the lender's failure to do so. The
court found that ''the plain language of T.I.L.A. evinces no
explicit exclusion of an intangible tax from the finance
charge,'' and that the intangible tax did not fall under any of
the exclusions in REGULATION Z dealing with security
interest charges. Claiming that numerous loans were subject
to rescission under Rodash, the industry prevailed upon
Congress and the Federal Reserve Board to change the law
retroactively through a revision to the FRB Staff
Commentary on REGULATION Z and the Truth in Lending
Act Amendments of 1995, signed into law on September 30,
1995. The amendments:

1. Exclude from the finance charge fees imposed by

settlement agents, attorneys, escrow companies, title
companies, and other third party closing agents, if the
creditor neither expressly requires the imposition of the
charges nor retains the charges; 2. Exclude from the finance
charge taxes on security instruments and loan documents if
the payment of the tax is a condition to recording the
instrument and the item is separately itemized and disclosed
(i.e., intangible taxes); 3. Exclude from the finance charge
fees for preparation of loan-related documents; 4. Exclude
from the finance charge fees relating to pest and flood
inspections conducted prior to closing; 5. Eliminate liability
for overstatement of the annual percentage rate. 6. Increase
the tolerance or margin of error; 7. Provide that mortgage
servicers are not to be treated as assignees. The
constitutionality of the retroactive provisions of the
Amendments is presently under consideration.

The FRB Staff Commentary amendments dealt primarily with

the question of third-party charges, and provided that they
were not finance charges unless the creditor required or
retained the charges.

The 1995 Amendments substantially eliminated the utility of

T.I.L.A. in challenging ''junk charges'' imposed by lenders.
However, ''junk charges'' are also subject to challenge under
RESPA, where they are used as devices to funnel kickbacks
or referral fees or excessive compensation to mortgage
brokers or originators. This issue is discussed below.


MORTGAGE ORIGINATORS A growing number of lawsuits
have been brought challenging the payment of ''upsells,''
''overages,'' ''yield spread premiums,'' and other fees by
lenders to mortgage brokers and originators.


During the last decade it became fairly common for

mortgage lenders to pay money to mortgage brokers
retained by prospective borrowers. In some cases, the
payments were expressly conditioned on altering the terms
of the loan to the borrower's detriment by increasing the
interest rate or ''points.'' For example, a lender might offer
brokers a payment of 50 basis points (0.5 percent of the
principal amount of the loan) for every 25 basis points above
the minimum amount (''par'') at which the lender was willing
to make the loan. Industry publications expressly
acknowledged that these payments were intended to
''compensate mortgage brokers for charging fees higher than
what the borrower would normally pay.'' In other instances,
brokers were compensated for convincing the prospective
borrower to take an adjustable-rate mortgage instead of a
fixed-rate mortgage or for inducing the purchase of credit
insurance by the borrower.

In the case of some loans, the payments by the lender to the

broker were totally undisclosed. In other cases, particularly
in connection with loans made after the amendments to
regulation X discussed below, there is an obscure reference
to the payment on the loan documents, usually in terms
incomprehensible to a lay borrower. For example, the HUD-1
form may contain a cryptic reference to a ''yield spread
premium'' or ''par plus pricing,'' often abbreviated like ''YSP
broker (POC) $ 1,500.''39

The burden of the increased interest rates and points

resulting from these practices is believed to fall
disproportionately on minorities and women. These practices
are subject to legal challenge on a number of grounds.

Breach of Fiduciary Duty Most courts have held that a

mortgage broker is a fiduciary. One who undertakes to find
and arrange financing or similar products for another
becomes the latter's agent for that purpose, and owes
statutory, contractual, and fiduciary duties to act in the
interest of the principal and make full disclosure of all
material facts. ''A person who undertakes to manage some
affair for another, on the authority and for the account of the
latter, is an agent.''

Courts have described a mortgage loan broker as an agent

hired by the borrower to obtain a loan. As such, a mortgage
broker owes a fiduciary duty of the ''highest good faith
toward his principal,'' the prospective borrower. Most
fundamentally, a mortgage broker, like any other agent who
undertakes to procure a service, has a duty to contact a
variety of providers and attempt to obtain the best possible

Additionally, a mortgage broker ''is 'charged with the duty of

fullest disclosure of all material facts concerning the
transaction that might affect the principal's decision'.'' The
duty to disclose extends to the agent's compensation. Thus,
a broker may not accept secret compensation from adverse

Furthermore, the duty to disclose is not satisfied by the

insertion of cryptic ''disclosures'' on documents. The
obligation is to ''make a full, fair and understandable
explanation'' of why the fiduciary is not acting in the
interests of the beneficiary and of the reasons that the
beneficiary might not want to agree to the fiduciary's

The industry has itself recognized these principles. The

National Association of Mortgage Brokers has adopted a
Code of Ethics which requires, among other things, that the
broker's duty to the client be paramount. Paragraph 3 of the
Code of Ethics states:

In accepting employment as an agent, the mortgage broker

pledges himself to protect and promote the interest of the
client. The obligation of absolute fidelity to the client's
interest is primary.

Thus, a lender who pays a mortgage broker secret

compensation may face liability for inducing the broker to
breach his fiduciary or contractual duties, fraud, or
commercial bribery.

Mail/Fraud/ Wire Fraud/ RICO The payment of

compensation by a lender to a mortgage broker without full
disclosure is also likely to result in liability under the federal
mail and wire fraud statutes and RICO. It is well established
that a scheme to corrupt a fiduciary or agent violates the
mail or wire fraud statute if the mails or interstate wires are
used in furtherance of the scheme.

Real Estate Settlement Procedures Act Irrespective of

whether the broker or other originator of a mortgage is a
fiduciary, lender payments to such a person may result in
liability under section 8 of RESPA, which prohibits payments
or fee splitting for business referrals, if the payments are
either not fully disclosed or exceed reasonable compensation
for the services actually performed by the originator.

Prior to 1992, the significance of section 8 of RESPA was

minimized by restrictive interpretations. The Sixth Circuit
Court of Appeals held that the origination of a mortgage was
not a ''settlement service'' subject to section 8.51 In
addition; cases construing the pre-1992 version of
implementing HUD regulation X required a splitting of fees
paid to a single person. Finally, the payment of
compensation in secondary market transactions was
excluded from RESPA, and there was no distinction made
between genuine secondary market transactions and ''table
funded'' transactions, where a mortgage company originates
a loan in its own name, but using funds supplied by a lender,
and promptly thereafter assigns the loan to the lender.

In 1992, RESPA and regulation X were amended to close

each of these loopholes. The amendments did not have
practical effect until August 9, 1994, the effective date of the
new regulation X.

First, RESPA was amended to provide expressly that the

origination of a loan was a ''settlement service.'' P.L. 102-
550 altered the definition of ''settlement service'' in Section
2602(3) to include ''the origination of a federally related
mortgage loan (including, but not limited to, the taking of
loan applications, loan processing, and the underwriting and
funding of loans).'' This change and a corresponding change
in regulation X were expressly intended to disapprove the
Sixth Circuit's decision in United States v. Graham Mtge.

Second, regulation X was amended to exclude table funded

transactions from the definition of ''secondary market
transactions.'' Regulation X addresses ''table funding'' in
sections 3500.2 and 3500.7. Section 3500.2 provides that
''table funding means a settlement at which a loan is funded
by a contemporaneous advance of loan funds and an
assignment of the loan to the person advancing the funds. A
table-funded transaction is not a secondary market
transaction (see Section 3500.5(b) (7)).'' Section 3500.5(b)
(7) exempts from regulation by RESPA fees and charges paid
in connection with legitimate ''secondary market
transactions,'' but excludes table funded transactions from
the scope of legitimate secondary market transactions.
Under the current regulation X, RESPA clearly applies to
table funded transactions. Amounts paid by the first
assignee of a loan to a ''table funding'' broker for ''rights'' to
the loan -- i.e., for the transfer of the loan by the broker to
the lender -- are now subject to examination under RESPA.

Third, any sort of payment to a broker or originator that

does not represent reasonable compensation for services
actually provided is prohibited.

Whatever the payment to the originator or broker is called, it

must be reasonable. Another mortgage industry publication
states: Any amounts paid under these headings [servicing
release premiums or yield spread premiums] must be
lumped together with any other origination fees paid to the
broker and be subjected to the referral fee/ market value
test in Section 8 of RESPA and Section 3500.14 of Regulation
X. If the total of this compensation exceeds the market value
of the services performed by the broker (excluding the value
of the referral), then the compensation does not pass the
test, and both the broker and the lender could be subject to
the civil and criminal penalties contained in RESPA.

Normal compensation for a mortgage broker is about one

percent of the principal amount of the loan. Where the
broker ''table funds'' the loan and originates it in its name,
an extra .5 percent or one percent may be appropriate. This
level of reasonableness is recognized by agency regulations.
For example, on February 28, 1996, in response to
allegations of gouging by brokers on refinancing VA loans,
the VA promulgated new regulations prohibiting mortgage
lenders from charging more than two points in refinanced


The amended regulation makes clear that a payment to a

broker for influencing the borrower in any manner is illegal.
''Referral'' is defined in Section 3500.14(f) (1) to include
''any oral or written action directed to a person which has
the effect of affirmatively influencing the selection by any
person of a provider of a settlement service or business
incident to or part of a settlement service when such person
will pay for such settlement service or business incident
thereto or pay a charge attributable in whole or in part to
such settlement service or business. . . .'' The amended
regulation also cannot be evaded by having the borrower
pay the originator. An August 14, 1992 letter from Frank
Keating, HUD's General Counsel, states unequivocally: ''We
read 'imposed upon borrowers' to include all charges which
the borrower is directly or indirectly funding as a condition of
obtaining the mortgage loan. We find no distinction between
whether the payment is paid directly or indirectly by the
borrower, at closing or outside the closing. . . . I hereby
restate my opinion that RESPA requires the disclosures of
mortgage broker fees, however denominated, whether paid
for directly or indirectly by the borrower or by the lender.''

Thus, ''yield spread premiums,'' ''service release fees,''

and similar payments for the referral of business are no
longer permitted. The new regulation was specifically
intended to outlaw the payment of compensation for the
referral of business by mortgage brokers, either directly or
through the imposition of ''junk charges.'' Thus, it provides
that payments may not be made ''for the referral of
settlement service business'' (Section 3500.14(b)).

The mortgage industry has recognized that types of fees that

were once viewed as permissible in the past are now
''prohibited and illegal.'' The legal counsel for the National
Second Mortgage Association acknowledged: ''Even where
the amount of the fee is reasonable, the more persuasive
conclusion is that RESPA does not permit service release
fees.'' ''Also, if . . . the lender is 'table funding' the loan, he
is violating RESPA's Section 8 anti-kickback provisions.''

In the first case decided under the new regulation, Briggs v.

Countrywide Funding Corp., the U. S. District Court for the
Middle District of Alabama denied a motion to dismiss a
complaint alleging the payment of a ''yield spread premium''
by a lender to a broker in connection with a table funded
transaction. Plaintiffs alleged that the payment violated
RESPA as well as several state law doctrines. The court
acknowledged that RESPA applied to the table funded
transactions and noted that whether or not disclosed, the
fees could be considered illegal.

Truth in Lending Act Implications Many of the pending cases

challenging the payment of ''yield spread premiums'' and
''upselling'' allege that the payment of compensation to an
agent of the lender is a T.I.L.A. ''finance charge.'' The basis
of the T.I.L.A. claims is that the commission a borrower pays
to his ''broker'' is a finance charge because the ''broker'' is
really functioning as the agent of the lender. The claim is not
that the ''upsell'' payment made by the lender to the
borrower's broker is a finance charge.

Decisions under usury statutes uniformly hold that a fee

charged to the borrower by the lender's agent is interest or
points. 64 The concept of the ''finance charge'' under
T.I.L.A. is broader than, but inclusive of, the concept of
''interest'' and ''points'' at common law and under usury
statutes. REGULATION Z specifically provides that the
''finance charge'' includes any ''interest'' and ''points''
charged in connection with a transaction. 65 Therefore, if the
intermediary is in fact acting on behalf of the lender, as is
the case where the intermediary accepts secret
compensation from the lender or acts in the lender's interest
to increase the amount paid by the borrower, all
compensation received by the intermediary, including
broker's fees charged to the borrower, are finance charges.

Unfair and Deceptive Acts and Practices The pending

''upselling'' cases also generally allege that the payment of
compensation to the mortgage broker violates the general
prohibitions of most state ''unfair and deceptive acts and
practices'' (''UDAP'') statutes. The violations of public policy
codified by the federal consumer protection laws create
corresponding state consumer protection law claims.

Civil Rights and Fair Housing Laws The Department of Justice

brought two cases in late 1995 alleging that the
disproportionate impact of ''overages'' and ''upselling'' on
minorities violated the Fair Housing Act and Equal Credit
Opportunity Act. Both cases alleged disparate pricing of
loans according to the borrower's race and were promptly
settled. Other investigations are reported to be pending. The
principal focus of enforcement agencies appears to be on the
civil rights implications of overages.

It is likely that such a practice would also violate 42 U.S.C.

Section 1981. While Section 1981 requires intentional
discrimination, a lender that decides to take advantage of
the fact that other lenders discriminate by making loans to
minorities at higher rates is also engaging in intentional
discrimination. In Clark v. Universal Builders, the Seventh
Circuit held that one who exploits and preys on the
discriminatory hardship of minorities does not occupy a more
protected status than the one who created the hardship in
the first instance; that is, a defendant cannot escape liability
under the Civil Rights Act by asserting it merely ''exploited a
situation crated by socioeconomic forces tainted by racial



of pending lawsuits is based on claims of misrepresentation
of or failure to disclose the circumstances under which
private mortgage insurance (''PMI'') may be terminated. PMI
insures the lender against the borrower's default -- the
borrower derives no benefit from PMI. It is generally
required under a conventional mortgage if the loan to value
ratio exceeds about 80 percent. Approximately 17.4 percent
of all mortgages have PMI.

Standard form conventional mortgages provide that if PMI is

required it maybe terminated as provided by agreement.
Most servicers and investors have policies for terminating
PMI. However, the borrower is often not told what the policy
is, either at the inception of the mortgage or at any later
time. As a result, people pay PMI premiums unnecessarily.
Since there is about $ 460 billion in PMI in force, this is a
substantial problem. The failure accurately and clearly to
disclose the circumstances under which PMI may be
terminated has been challenged under RICO and state
consumer fraud statutes.


ground of litigation concerns the imposition of charges that
are not authorized by law or the instruments being serviced.
The collection of modest charges is a key component of
servicing income. For example, many mortgage servicers
impose charges in connection with the payoff or satisfaction
of mortgages when the instruments either do not authorize
the charge or affirmatively prohibit it.

The imposition of payoff and recording charges has been

challenged as a breach of contract, as a deceptive trade
practice, as a violation of RICO, and as a violation of the Fair
Debt Collection Practices Act (''FDCPA''). In Sandlin v. State
Street Bank, the U. S. District Court for the Middle District of
Florida held that the imposition of a payoff statement fee is a
violation of the standard form ''uniform instrument'' issued
by the Federal National Mortgage Association and Federal
Home Loan Mortgage Corporation, and when imposed by
someone who qualifies as a ''debt collector'' under the
FDCPA, violates that statute as well. However, attempts to
challenge such charges under RESPA have been
unsuccessful, with courts holding that a charge imposed
subsequent to the closing is not covered by RESPA.


Adjustable rate mortgages Adjustable rate mortgages

(''ARMs'') were first proposed by the Federal Home Loan
Bank Board in the 1970s. They first became widespread in
the early 1980s. At the present time, about 25 to 30 percent
of all residential mortgages are adjustable rate mortgages

The ARM adjustment practices of the mortgage banking

industry have been severely criticized because of widespread
errors. Published reports beginning in 1990 indicate that 25
to 50 percent of all ARMs may have been adjusted
incorrectly at least once. The pattern of misadjustments is
not random: approximately two-thirds of the inaccuracies
favor the mortgage company.

Grounds for legal challenges to improper ARM adjustments

include breach of contract, T.I.L.A., the Uniform Consumer
Credit Code, RICO, state unfair and deceptive practices
statutes, failure to properly respond to a ''qualified written
request'' under section 6(e) of RESPA, and usury.

Substantial settlements of ARM claims have been made by

Citicorp Mortgage, First Nationwide Bank, and Banc One. On
the other hand, several cases have rejected borrower claims
that particular ARM adjustment actions violated the terms of
the instruments. For example, a Connecticut case held that a
mortgage that provided for an interest rate tied to the
bank's current ''market rate'' was not violated when the
bank failed to take into account the rate that could be
obtained through the payment of a ''buydown.'' A
Pennsylvania case held that the substitution of one index for
another that had been discontinued was consistent with the
terms of the note and mortgage.

A major issue in ARM litigation is whether what the industry

erroneously terms ''undercharges'' -- the failure of the
servicer to charge the maximum amount permitted under
the terms of the instrument -- can be ''netted'' or offset
against overcharges -- the collection of interest in excess of
that permitted under the terms of the instrument. Fannie
Mae has taken the position that ''netting'' is appropriate.

The validity of this conclusion is questionable. First, nothing

requires a financial institution to adjust interest rates upward
to the maximum permitted, and there are in fact often sound
business reasons for not doing so. On the other hand, the
borrower has an absolute right not to pay more than the
instrument authorizes. Thus, what the industry terms an
''undercharge'' is simply not the same thing as an

Second, the upward adjustment of interest rates must be

done in compliance with T.I.L.A.. An Ohio court held that
failure to comply made the adjustment unenforceable.
''Where a bank violates the Truth-in-Lending Act by
insufficient disclosure of a variable interest rate, the court
may grant actual damages. . . . If the actual damage is the
excess interest charge over the original contract term, the
court may order the mortgage to be recalculated at its
original terms, and refuse to enforce the variable interest
rate provisions.''

Third, if the borrower is behind in his payments, ''netting''

may violate state law requiring the lender to proceed against
the collateral before undertaking other collection efforts. A
decision of the California intermediate appellate court
concluded that the state's ''one-action rule'' had been
violated when a lender obtained an offset of interest
overcharges against amounts owed by the borrower under
an ARM.

1. E.g., G. Marsh, Lender Liability for Consumer Fraud

Practices of Retail

Dealers and Home Improvement Contractors, 45 Ala. L. Rev.

1 (1993); D. Edelman, Second Mortgage Frauds, Nat'l
Consumer Rights Litigation Conference 67 (Oct. 19-20,

2. The lender would deposit the escrow funds in a non-

interest-bearing account at a bank which made loans to the
lender. The lender would receive a ''funds credit'' against the
interest payable on its borrowings based on the value of the
escrow funds deposited at the bank.

3. Aitken v. Fleet Mtge. Corp., 1991 U.S.Dist.

• LEXIS 10420 (ND Ill., July 30,1991), and 1992 U.S.Dist.

LEXIS 1687 (ND Ill., Feb. 12, 1992);
• Attorney General v. Michigan Nat'l Bank, 414 Mich. 948,
325 N.W.2d 777 (1982);
• Burkhardt v. City Nat'l Bank, 57 Mich. App. 649, 226
N.W.2d 678 (1975).

4. See generally, Class Actions Under Anti-Trust Laws on

Account of Escrow and Similar Practices, 11 Real Prop.,
Probate & Trust Journal 352 (Summer 1976).

5. Buchanan v. Century Fed. S. & L. Ass'n, 306 Pa. Super.

253, 452 A.2d 540(1982), later opinion, 374 Pa. Super. 1,
542 A.2d 117 (1986);
Carpenter v. Suffolk Franklin Savings. Bank, 370 Mass. 314,
346 N.E.2d 892 (1976);

Brooks v. Valley Nat'l Bank, 113 Ariz. 169, 548 P.2d 1166

Petherbridge v. Prudential S. & L. Ass'n, 79 Cal.App.3d 509,

145 Cal.Rptr. 87 (1978);

Marsh v. Home Fed. S. & L. Ass'n, 66 Cal.App.3d 674, 136

Cal.Rptr. 180 (1977);

LaThrop v. Bell Fed. S. & L. Ass'n, 68 Ill.2d 375, 370 N.E.2d

188 (1977);


Sears v. First Fed. S. & L. Ass'n, 1 Ill.App.3d 621, 275

N.E.2d 300 (1st Dist. 1973); Durkee v. Franklin Savings
Ass'n, 17 Ill.App.3d 978, 309 N.E.2d 118 (2d Dist. 1974);
Zelickman v. Bell Fed. S. & L. Ass'n, 13 Ill.App.3d 578, 301
N.E.2d 47 (1st Dist. 1973); Yudkin v. Avery Fed. S. & L.
Ass'n, 507 S.W.2d 689 (Ky. 1974); First Fed. S. & L. Ass'n of
Lincoln v. Board of Equalization of Lancaster County, 182
Neb. 25, 152 N.W.2d 8 (1967); Kronisch v. Howard Savings
Institution, 161 N.J.Super. 592, 392 A.2d 178 (1978);
Surrey Strathmore Corp. v. Dollar Savings Bank of New
York, 36 N.Y.2d 173, 366 N.Y.S.2d 107, 325 N.E.2d 527
(1975); Tierney v. Whitestone S. & L. Ass'n, 83 Misc.2d 855,
373 N.Y.S.2d 724 (1975); Cale v. American Nat'l Bank, 37
Ohio Misc. 56, 66 Ohio Ops.2d 122 (1973); Richman v.
Security S. & L. Ass'n, 57 Wis.2d 358, 204 N.W.2d 511
(1973); In re Mortgage Escrow Deposit Litigation, 1995
U.S.Dist. LEXIS 1555 (ND Ill. Feb. 8, 1995).

6. National Mortgage News, Nov. 11, 1991, p. 2.

7. Leff v. Olympic Fed. S & L Ass'n, 1986 WL 10636 (ND Ill


8. Overcharging on Mortgages: Violations of Escrow

Account Limits by the Mortgage Lending Industry: Report by
the Attorneys General of California, Florida, Iowa,
Massachusetts, Minnesota, New York & Texas (24 Apr 1990).

9. Leff v. Olympic Fed. S. & L. Ass'n, n. 7 supra; Aitken v.

Fleet Mtge.Corp., 1992 U.S.Dist. LEXIS 1687 (ND Ill., Feb.
12, 1992); Weinberger v. Bell Federal, 262 Ill.App.3d 1047,
635 N.E.2d 647 (1st Dist. 1994); Poindexter v. National
Mtge. Corp., 1995 U.S.Dist. LEXIS 5396 (ND Ill., April, 24,
1995); Markowitz v. Ryland Mtge. Co., 1995 U.S.Dist. LEXIS
11323 (ND Ill. Aug. 8, 1995); Sanders v. Lincoln Service
Corp., 1993 U.S.Dist. LEXIS 4454 (ND Ill. Apr. 9, 1993);
Cairns v. Ohio Sav. Bank, 1996 Ohio App. LEXIS 637 (Feb.
22, 1996). See generally, GMAC Mtge. Corp. v. Stapleton,
236 Ill.App.3d 486, 603 N.E.2d 767 (1st Dist. 1992), leave
to appeal denied, 248 Ill.2d 641, 610 N.E.2d 1262 (1993).

10. Leff v. Olympic Fed. S. & L. Ass'n, n. 7 supra; Aitken v.

Fleet Mtge. Corp., n.9 supra; Poindexter v. National Mtge.
Corp., n.9 supra; Sanders v. Lincoln Service Corp., n. 9

11. Leff v. Olympic Fed. S. & L. Ass'n, Aitken v. Fleet Mtge.

Corp., n.9 supra; Robinson v. Empire of America Realty
Credit Corp., 1991 U.S.Dist. LEXIS 2084 (ND Ill., Feb. 20,
1991); Poindexter v. National Mtge. Corp., n. 9 supra.

12. Poindexter v. National Mtge. Corp., n. 9 supra.

13. Martinez v. Weyerhaeuser Mtge. Co., 1995 U.S.Dist.

LEXIS 11367 (ND Ill. Aug. 8, 1995). The theory is that the
excessive portion of the escrow deposit is a finance charge.

14. 12 U.S.C. Section 2609.

15. State of Louisiana v. Litton Mtge. Co., 50 F.3d 1298 (5th

Cir. 1995); Allison v. Liberty Savings, 695 F.2d 1086, 1091
(7th Cir. 1982); Herrman v. Meridian Mtge. Corp., 901
F.Supp. 915 (ED Pa. 1995); Campbell v. Machias Savings
Bank, 865 F.Supp. 26, 31 (D.Me. 1994); Michels v.
Resolution Trust Corp., 1994 U.S.Dist. LEXIS 6563 (D.Minn.
Apr. 13, 1994); Bergkamp v. New York Guardian Mortgagee
Corp., 667 F.Supp. 719, 723 (D.Mont. 1987). Contra, Vega
v. First Fed. S. & L. Ass'n, 622 F.2d 918, 925 (6th Cir.

16. 24 C.F.R. 3400.

17, issued at 60 FR 24734.17. The pre-1990 ''uniform

instrument'' issued by the Federal National Mortgage
Association and the Federal Home Loan Mortgage
Corporation did not provide for any surplus. The pre-1990
FHA form and the VA form provided for a one-month


18. The finance charge includes ''any charge, payable

directly or indirectly by the consumer, imposed directly or
indirectly by the creditor, as an incident to or a condition of
the extension of credit.'' REGULATION Z, 12 C.F.R.
226.4(a). The definition is all-inclusive: any charge that
meets this definition is a finance charge unless it is
specifically excluded by T.I.L.A. or REGULATION Z. R.
Rohner, The Law of Truth in Lending, section 3.02 (1984).
There are exclusions from the finance charge which apply
only in mortgage transactions. 12 C.F.R. 226.4(c)(7).
However, the exclusions require that the charges be bona
fide and reasonable in amount, id., and the exclusions are
narrowly construed to protect consumers from
underdisclosure of the cost of credit. Equity Plus Consumer
Fin. & Mtge. Co. v. Howes, 861 P.2d 214, 217 (NM 1993).
See also In re Celona, 90 B.R. 104 (Bankr.ED Pa. 1988),
aff'd 98 B.R. 705 (Bankr. ED Pa. 1989). ''Only those charges
specifically exempted from inclusion in the 'finance charge'
by statute or regulation may be excluded from it.'' Buford v.
American Fin. Co., 333 F.Supp. 1243, 1247 (ND Ga. 1971).

19. In re Souders, 1992 U.S.Comp.Gen. LEXIS 1075 (Sept.

29, 1992); In re Barry, 1981 U.S.Comp.Gen. LEXIS 1262
(April 16, 1981); In re Bayer, 1977 U.S.Comp.Gen. LEXIS
2116 (Sept. 19, 1977); In re Wahl, 1974 U.S.Comp.Gen.
LEXIS 1610 (Oct. 1, 1974); In re Ray, 1973 U.S.Comp.Gen.
LEXIS 1960 (March 13, 1973). A tax service fee represents
the purported cost of having someone check the real estate
records annually to make sure that the taxes on the property
securing the loan are shown as having been paid.

20. In re Celona, 90 B.R. 104, 110-12 (Bankr. E.D.Pa.

1988), aff'd, 98 B.R. 705 (ED Pa. 1989) (lender violated
T.I.L.A. by passing on $200.00 fee charged by attorney to
review certain documents without including fee in ''finance
charge''); Abel v. Knickerbocker Realty Co., 846 F.Supp. 445
(D.Md. 1994) (lender violated T.I.L.A. because ''origination
fee'' of $290.00 excluded from ''finance charge''); Brodo v.
Bankers Trust Co., 847 F.Supp. 353 (ED Pa. 1994) (lender
violated T.I.L.A. by imposing charge for preparing T.I.L.A.
disclosure documents without including them in the ''finance

21. Cheshire Mtge. Service, Inc. v. Montes, 223 Conn. 80,

612 A.2d 1130 (1992) (lender violated T.I.L.A. by imposing
fee for assigning the mortgage when it was sold on the
secondary market without including it in the ''finance
charge''); In re Brown, 106 B.R. 852 (Bankr. E.D.Pa. 1989)
(same); Mayo v. Key Fin. Serv., Inc., 92-6441-D
(Mass.Super.Ct., June 22, 1994) (same).

22. In re Anibal L. Toboas, 1985 U.S.Comp.Gen. LEXIS 854

(July 19, 1985) (''The relevant part of REGULATION Z
expressly categorizes service charges and loan fees as part
of the finance charge when they are imposed directly or
indirectly on the consumer incident to or as a condition of
the extension of credit. The finance charge, therefore, is not
limited to interest expenses but includes charges which are
imposed to defray a lender's administrative costs. A
messenger service charge paid to the mortgage lender may
not be reimbursed because it is part of the lender's
overhead, a charge for which is considered part of the
finance charge under REGULATION Z.''); In re Schwartz,
1989 U.S. Comp. Gen. LEXIS 55 (Jan. 19, 1989) (''a
messenger service charge or fee is part of the lender's
overhead, a charge which is deemed to be a finance charge
and not reimbursable'').
23. Decision of the Comptroller General No. B-181037, 1974
U.S.Comp.Gen. LEXIS 1847 (July 16, 1974) (loan closing fee
was part of the finance charge under T.I.L.A.); Decision of
the Comptroller General, No. B-189295 1977, U.S.
Comp.Gen. LEXIS 2230 (Aug. 16, 1977) (same); In the
Matter of Real Estate Expenses -- Finance Charges, No. B-
179659, 54 Comp. Gen. 827, 1975 U.S.Comp.Gen. LEXIS
180 (April 4, 1975) (same).

24. Abbey v. Columbus Dodge, 607 F.2d 85 (5th Cir. 1979)

(purported $ 37.50 ''filing fee'' that creditor pocketed was a
finance charge); Therrien v. Resource Finan. Group. Inc.,
704 F.Supp. 322, 327 (DNH 1989) (double-charging for
recording and discharge fee and title insurance premium
constituted undisclosed finance charges).

25. Decision of the Comptroller General, B-174030, 1971

U.S. Comp. Gen. LEXIS 1963 (Nov. 11, 1971).

26. 16 F.3d 1142 (11th Cir. 1994).

27. Id. at 1149.

28. 60 FR 16771, April 3, 1995.

29. See Jean M. Shioji, Truth in Lending Act Reform

Amendments of 1995, Rev. of Bank. and Finan. Serv., Dec.
13, 1995, Vol. 11, No. 21; at 235.

30. P.L. 104-29, sections 2(a), (c), (d), and (e), to be

codified at 15 U.S.C. 1605(a), (c), (d) and (e).

31. P.L. 104-29, section 2(b), to be codified at 15 U.S.C.


32. The amendment broadened the language in 15 U.S.C.

1605(e)(2), which previously excluded ''fees for preparation
of a deed, settlement statement, or other documents.''

33. P.L. 104-29, sections 2(a), (c), (d), and (e), to be

codified at 15 U.S.C. 1605(a), (c), (d) and (e).

34. P.L. 104-29, section 3(a), to be codified at 15 U.S.C.

1605(f)(2); P.L. 104-29, section 4(a), to be codified at 15
U.S.C. 1649(a)(3); P.L. 104-29, section 8, to be codified at
15 U.S.C. 1635(i)(2); 15 U.S.C. 1606(c).

35. P.L. 104-29, section 7(b), to be codified at 15 U.S.C.

1641(f). The apparent purpose of this provision was to alter
the result in Myers v. Citicorp Mortgage, 1995 U.S.Dist.
LEXIS 3356 (MD Ala., March 14, 1995).

36. The amendments were applied to existing transactions in

Hickey v. Great W. Mtge. Corp., 158 F.R.D. 603 (ND Ill.
1994), later opinion, 1995 U.S. Dist. LEXIS 405 (ND Ill., Jan.
3, 1995), later opinion, 1995 U.S. Dist. LEXIS 3357 (ND Ill.,
Mar. 15, 1995), later opinion, 1995 U.S. Dist. LEXIS 4495
(ND Ill., Apr. 4, 1995), later opinion, 1995 U.S. Dist. LEXIS
6989 (ND Ill., May 1, 1995); and Cowen v. Bank United,
1995 U.S.Dist. LEXIS 4495, 1995 WL 38978 (ND Ill., Jan.
25, 1995), aff'd, 70 F.3d 937 (7th Cir. 1995).

37. Jonathan S. Hornblass, Fleet Unit Discontinues Overages

on Loans to the Credit-Impaired, American Banker, June 9,
1995, p. 8. See also, Kenneth R. Harney, Loan Firm to
Refund $ 2 Million in 'Overage' Fees, Los Angeles Times,
Nov. 6, 1994, part K, p. 4, col. 1 (''Yield spread premiums''
or ''overages'' are paid ''to brokers when borrowers lock in or
sign contracts at rates or terms that exceed what the lender
would otherwise be willing to deliver''); Ruth Hepner, Risk-
based loan rates may rate a look, Washington Times, Nov. 4,
1994, p. F1 (such fees are paid to mortgage brokers ''to
bring in borrowers at higher-than-market rates and fees'');
Jonathan S. Hornblass, Focus on Overages Putting Home
Lenders in Legal Hot Seat, American Banker, May 24, 1995,
p. 10 (giving examples of how the fees affect the borrower).

38. The extra fees -- known in the trade as overages or

yield-spread premiums -- typically are paid to local mortgage
brokers by large lenders who purchase their home loans. The
concept is straightforward: If a mortgage company can
deliver a loan at higher than the going rate, or with higher
fees, the loan is worth more to the large lender who buys it.
For every rate notch above ''par'' -- the lender's standard
rate -- the lender will pay a local originator a bonus. Kenneth
R. Harney, Suit Targets Extra Fees Paid When Mortgage Rate
Inflated, Sacramento Bee, Aug. 13, 1995, p. J1.

39. Prior to 1993, according to industry experts, back-end

compensation of this type rarely was disclosed to
consumers. More recently, however, some brokers and
lenders have sharply limited the size of the fees and
disclosed them. They often appear as one or more line items
on the standard HUD-1 settlement sheets used for closings
nationwide. Id.

40. Jonathan S. Hornblass, Focus on Overages Putting Home

Lenders In Legal Hot Seat, American Banker, May 24, 1995,
p. 10; K. Harney, U. S. Probes Higher Fees for Women,
Minorities, Los Angeles Times, Sept. 24, 1995, p. K4.


41. In re Estate of Morys, 17 Ill.App.3d 6, 9, 307 N.E.2d 669

(1st Dist. 1973).

42. Wyatt v Union Mtge. Co., 24 Cal.3d 773, 782, 157

Cal.Rptr. 392, 397, 598 P.2d 45 (1979); accord: Pierce v.
Hom, 178 Cal. Rptr. 553, 558 (Ct. App. 1981) (mortgage
broker has duty to use his expertise in real estate financing
for the benefit of the borrower); Allabastro v. Cummins, 90
Ill.App.3d 394, 413 N.E.2d 86, 82 (1st Dist. 1980);
Armstrong v. Republic Rlty. Mgt. Corp., 631 F.2d 1344 (8th
Cir. 1980); In re Dukes, 24 B.R. 404, 411-12 (Bankr. ED
Mich. 1982) (''the fiduciary, Salem Mortgage Company,
failed to provide the borrower-principal with any sort of
estimate as to the ultimate charges until a matter of minutes
before the borrower was to enter into the loan agreement'');
Community Fed. Savings v. Reynolds, 1989 U.S. Dist. LEXIS
10115 (N.D.Ill., Aug. 18, 1989); Langer v. Haber Mortgages,
Ltd., New York Law Journal, August 2, 1995, p. 21 (N.Y.
Sup.Ct.). See also, Tomaszewski v. McKeon Ford, Inc., 240
N.J.Super. 404, 573 A.2d 101 (1990) Browder v, Hanley
Dawson Cadillac Co., 62 Ill.App.3d 623, 379 N.E.2d 1206
(1st Dist. 1978) Fox v. Industrial Cas. Co., 98 Ill.App.3d
543, 424 N.E.2d 839 (1st Dist. 1981); Hlavaty v. Kribs Ford
Inc., 622 S.W.2d 28 (Mo.App. 1981), and Spears v. Colonial
Bank, 514 So.2d 814 (Ala. 1987) (Jones, J., concurring),
dealing with the duty of a seller of goods or services who
undertakes to procure insurance for the purchaser. See
generally 12 Am Jur 2d, Brokers, Section 84.

43. Wyatt v. Union Mtge. Co., 24 Cal.3d 773, 782, 157

Cal.Rptr. 392, 397, 598 P.2d 45 (1979).

44. Brink v. Da Lesio, 496 F.Supp. 1350 (D.Md. 1980),

modified, 667 F.2d 420 (4th Cir. 1981)

45. Wyatt v Union Mtge. Co., 24 Cal.3d 773, 782, 157

Cal.Rptr. 392, 397, 598 P.2d 45 (1979).

46. Martin v. Heinold Commodities, Inc. 139 Ill.App.3d 1049,

487 N.E.2d 1098. 1102-03 (1st Dist. 1985), aff'd in part and
rev'd in part, 117 Ill.2d 67, 510 N.E.2d 840 (1987), appeal
after remand, 240 Ill.App.3d 536, 608 N.E.2d 449 (1st Dist.
1992), aff'd in part and rev'd in part, 163 Ill.2d 33, 643
N.E.2d 734 (1994).

47. An agreement between a seller and an agent for a

purchaser whereby an increase in the purchase price was to
go to the agent unbeknownst to the purchaser, constitutes
fraud. Kuntz v. Tonnele, 80 N.J.Eq. 372, 84 A. 624, 626 (Ch.
1912). The buyer may sue both his agent and the seller. Id.

48. Starr v. International Realty, Ltd., 271 Or. 296, 533 P.2d
165, 167-8 (1975).

49. Bunker Ramo Corp. v. United Business Forms, Inc., 713

F.2d 1272 (7th Cir. 1983); Hellenic Lines, Ltd. v. O'Hearn,
523 F.Supp. 244 (SDNY 1981); CNBC, Inc. v. Alvarado,
1994 U.S.Dist. LEXIS 11505 (SDNY 1994). Shushan v.
United States, 117 F.2d 110, 115 (5th Cir. 1941), United
States v. George, 477 F.2d 508, 513 (7th Cir. 1973);
Formax, Inc. v. Hostert, 841 F.2d 388, 390-91 (Fed. Cir.
1988); United States v. Shamy, 656 F.2d 951, 957 (4th Cir.
1981); United States v. Bruno, 809 F.2d 1097, 1104 (5th
Cir. 1987); United States v. Isaacs, 493 F.2d 1124, 1150
(7th Cir. 1974); United States v. Mandel, 591 F.2d 1347,
1362 (4th Cir. 1979); United States v. Keane, 522 F.2d 534,
546 (7th Cir. 1975); United States v. Barrett, 505 F.2d
1091, 1104 (7th Cir. 1974); GLM Corp. v. Klein, 684 F.Supp.
1242, 1245 (SDNY 1988); United States v. Procter & Gamble
Co., 47 F.Supp. 676, 678-79 (D.Mass. 1942); United States
v. Aloi, 449 F.Supp. 698, 718 (EDNY 1977); United States v.
Fineman, 434 F.Supp. 189, 195 (EDPa. 1977).

50. U.S.C. Section 2607.

51. United States v. Graham Mtge. Corp., 740 F.2d 414 (6th
Cir. 1984).

52. Durr v. Intercounty Title Co., 826 F.Supp. 259, 262 (ND
Ill. 1993), aff'd, 14 F.3d 1183 (7th Cir. 1994); Campbell v.
Machias Savings Bank, 865 F.Supp. 26, 31 n. 5 (D.Me.
1994); Mercado v. Calumet Fed. S. & L. Ass'n, 763 F.2d 269,
270 (7th Cir. 1985); Family Fed. S. & L. Ass'n v. Davis, 172
B.R. 437, 466 (Bankr. DDC 1994); Adamson v. Alliance
Mtge. Co., 677 F.Supp. 871 (ED Va. 1987), aff'd, 861 F.2d
63 (4th Cir. 1988); Duggan v. Independent Mtge. Corp., 670
F.Supp. 652, 653 (ED Va. 1987).

53. The Alabama Supreme Court described the ''table

funding'' relationship as:

Under this arrangement, the mortgage broker or

correspondent lender performs all of the originating
functions and closes the loan in the name of the mortgage
broker with funds supplied by the mortgage lender. The
mortgage broker depends upon ''table funding,'' the
simultaneous advance of the loan funds from the mortgage
lender to the mortgage broker. Once the loan is closed, the
mortgage broker immediately assigns the mortgage to the
mortgage lender. The essence of the table funding
relationship is that the mortgage broker identifies itself as
the creditor on the loan documents even though the
mortgage broker is not the source of the funds. (Emphasis
added). Smith v. First Family Financial Services Inc., 626
So.2d 1266, 1269 (Ala. 1993).

54. 57 FR 49607, Nov. 2, 1992; 57 FR 56857, Dec. 1, 1992;

59 FR 6515, Feb. 10, 1994.

55. N. 51 supra. In conjunction with amending regulation X,

the Department of Housing and Urban Development made
the following statement regarding the Sixth Circuit's
interpretation of RESPA and regulation X: HUD has
consistently taken the position that the prohibitions of
Section 8 of RESPA (12 U.S.C. 2607) extended to loan
referrals. Although the making of a loan is not delineated as
a ''settlement service'' in Section 3(3) of RESPA (12 U.S.C.
2602(3)), it has always been HUD's position, based on the
statutory language and the legislative history, that the
section 3(3) list was not an inclusive list of all settlement
services and that the origination, processing and funding of a
mortgage loan was a settlement service. In U.S. v. Graham
Mortgage Corp., 740 F.2d 414 (6th Cir. 1984), the Sixth
Circuit Court of Appeals stated that HUD's interpretation that
the making of a mortgage loan was a part of the settlement
business was unclear for purposes of criminal prosecution,
and based and the rule of lenity, overturned a previous
conviction. In response to the Graham case, HUD decided to
amend its regulations to state clear and specifically that the
making and processing of a mortgage loan was a settlement
service. Accordingly, HUD restates its position unequivocally
that the originating, processing, or funding of a mortgage
loan is a settlement service in this rule. 57 F.R. 49600(Nov.
2, 1992).


56. Table Funding Rebuffed Again, National Mortgage News,

Feb. 21, 1994, p. 6; HUD May Grant Home Equity Reprieve,
Thomson's International Bank Accountant, Dec. 13, 1993, p.
4; HUD Wants Expansion of Mortgage Broker Fee Disclosure,
National Mortgage News, p. 25 (Sept. 14, 1992).

57. Table Funding, Fee Rulings Near, Banking Attorney, Dec.

13, 1993, vol. 3, no. 47, p. 5; Table Funding to Be
Disclosed, International Bank Accountant, Dec. 13, 1993,
vol. 93, no. 47, p. 4.

58. The current version of regulation X, 24 C.F.R. Section

3500.14, provides, in part, as follows: Prohibition against
kickbacks and unearned fees. (a)Section 8 violation. Any
violation of this section is a violation of section 8 of RESPA
(12 U.S.C. Section 2607) and is subject to enforcement as
such under Section 3500.19(b). . . (b) No referral fees. No
person shall give and no person shall accept any fee,
kickback, or other thing of value pursuant to any agreement
or understanding, oral or otherwise, that business incident to
or a part of a settlement service involving a federal-related
mortgage loan shall be referred to any person. (c) No split of
charges except for actual services performed. No person
shall give and no person shall accept any portion, split, or
percentage of any charge made or received for the rendering
of a settlement service in connection with a transaction
involving a federally-related mortgage loan other than for
services actually performed. A charge by a person for which
no or nominal services are performed or for which
duplicative fees are charged is an unearned fee and violates
this section. The source of the payment does not determine
whether or not a service is compensable. Nor may the
prohibitions of this Part be avoided by creating an
arrangement wherein the purchaser of services splits the
fee. (Emphasis added)

59. Robert P. Chamness, Compliance Alert: What Changed

the Face of the Mortgage Lending Industry Overnight?, ABA
Bank Compliance, Spring 1993, p. 23. Accord, Heather
Timmons, U.S. Said to Plan Crackdown on Referral Fees,
American Banker, Dec. 20, 1995, p. 10. (''Section 8 [of
RESPA] has prompted close scrutiny of back-end points,
mortgage fees paid to a broker by the lender after closing.
Federal attorneys are concerned that some lenders are
improperly hiding referral fees in the rates charged to
consumers . . . .''); HEL Lenders May Be Sued on Broker
Referrals, National Mortgage News, April 3, 1995, p. 11
supra, (''there no longer is any possible justification for
paying back-end points . . . [because] the very essence is
that the compensation is paid for referral'').

60. Mary Sit, Mortgage Brokers Can Help Borrowers. Boston

Globe, Oct. 3, 1993, p. A13; Jeremiah S. Buckley and Joseph
M. Kolar, What RESPA has Wrought: Real Estate Settlement
Procedures, Savings & Community Banker, Feb. 1993, vol. 2,
no. 2, p. 32.

61. 61 F.R. 7414 (February 28, 1996). See also Kenneth

Harney, Nation's Housing: VA Eyes Home-Loan Abuses,
Newsday p. D02 (Mar. 15, 1996). See also See Leonard A.
Bernstein, RESPA Invades Secondary Mortgage Financing,
New Jersey Lawyer, Aug. 1, 1994. HUD Stepping Up RESPA
Inspections, American Banker Washington Watch, May 3,

62. HEL Lenders May Be Sued on Broker Referrals, National

Mortgage News, April 3, 1995, p. 11.

63. 95-D-859-N (MD Ala., Mar. 8, 1996),

64. Fowler v. Equitable Trust Co., 141 U.S. 384 (1891); In

re West Counties Construction Co., 182 F.2d 729, 731 (7th
Cir. 1950) (''Calling the $ 1,000 payment to Walker a
commission did not change the fact that it was an additional
charge for making the loan''); Union Nat'l Bank v. Louisville,
N. A & C. R. Co., 145 Ill. 208, 223, 34 N.E. 135 (1893)
(''There can be no doubt that this payment, though
attempted to be disguised under the name of 'commission,
was in legal effect an agreement to pay a sum additional to
the [lawful rate of interest], as the consideration or
compensation for the use of the money borrowed, and is to
be regarded as, to all intents and purposes, an agreement
for the payment of additional interest''); North Am. Investors
v. Cape San Blas Joint Venture, 378 So.2d 287 (Fla. 1978);
Feemster v. Schurkman, 291 So.2d 622 (Fla.App. 1974);
Howes v. Curtis, 104 Idaho 563, 661 P.2d 729 (1983);
Duckworth v. Bernstein, 55 Md.App. 710, 466 A.2d 517
(1983); Coner v Morris S. Berman, Unltd., 65 Md.App. 514,
501 A.2d 458 (1985) (violation of state secondary mortgage
and finders' fees laws); Julian v Burrus, 600 S.W.2d 133
(Mo.App. 1980); DeLee v. Hicks, 96 Nev. 462, 611 P.2d
211(1980); United Mtge. Co. v. Hilldreth, 93 Nev. 79, 559
P.2d 1186 (1977); O'Connor v Lamb, 593 S.W.2d 385
(Tex.Civ.App. 1979) (purported broker was the actual
lender); Terry v. Teachworth, 431 S.W.2d 918 (Tex.Civ.App.
1968); Durias v. Boswell, 58 Wash.App. 100, 791 P.2d 282
(1990) (broker's fee is interest where broker is agent of
lender; factors relevant to determining agency include
lender's reliance on broker for information concerning
creditworthiness of borrower, preparation of documents
necessary to close and adequately secure the loan, and
performing recordkeeping functions; not relevant whether
lender knew of broker's fee, as Washington law provides that
where broker acts as agent for both borrower and lender, it
is deemed lender's agent for purposes of usury statute);
Sparkman & McLean Income Fund v. Wald, 10 Wash.App.
765, 520 P.2d 173 (1974); Payne v Newcomb, 100 Ill. 611,
616-17 (1881) (where intermediary was agent of lender,
fees exacted by the intermediary on borrowers made loans
usurious); Meers v. Stevens, 106 Ill. 549, 552 (1883)
(borrower approaches A for loan, A directs borrower to B, a
relative, who makes the loan in the name of A and charges a
''commission'' for procuring it; court held transaction was an
''arrangement to charge usury, and cover it up under the
claim of commissions); Farrell v. Lincoln Nat'l Bank, 24
Ill.App.3d 142, 146, 320 N.E.2d 208 (1st Dist. 1974) (''if a
fee is paid to a lender's agent for making the loan, with the
lender's knowledge, the amount of the fee is treated as
interest for the purposes of determining usury'').

65. 12 C.F.R. Section 226.4(b)(1), (3).

66. FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244-45
(1972); Cheshire Mtge. Service, Inc. v. Montes, 223 Conn.
80, 107, 612 A.2d 1130 (1992) (court found a T.I.L.A.
violation to violate the Connecticut Unfair Trade Practices Act
because the violation of T.I.L.A. was contrary to its public
policy of accurate loan disclosure).

67. 42 U.S.C. Section 3601 et seq.

68. 15 U.S.C. Section 1691 et seq.

69. Consent decree, United States v. Security State Bank of

Pecos, WD Tex., filed Oct. 18, 1995; consent decree, United
States v. Huntington Mortgage Co., ND Ohio, filed Oct. 18,

70. Bank Said to Face Justice Enforcement Action, Mortgage

Marketplace, Mar. 25, 1996, v. 6, no. 12, p. 5.

71. M. Hill, Banks Revise Overage Lending Policies,

Cleveland Plain Dealer, July 14, 1994, p. 1C; Jonathan S.
Hornblass, Focus on Overages Putting Home Lenders in
Legal Hot Seat, American Banker, May 24, 1995, p. 10; John
Schmeltzer, Lending investigation expands; U.S. wants to
know if minorities are paying higher fees, Chicago Tribune,
May 19, 1995, Business section, p. 1.

72. 501 F.2d 324, 330-31 (7th Cir. 1974).

73. See also DuFlambeau v. Stop Treaty Abuse-Wisconsin,
Inc., 41 F.3d 1190, 1194 (7th Cir. 1994). See Mescall v.
Burrus, 603 F.2d 1266 (7th Cir. 1979); Ortega v. Merit
Insurance Co., 433 F.Supp. 135 (ND Ill. 1977) (plaintiff's
allegations that a de facto system of discriminatory credit
insurance pricing exists, and that defendant is exploiting this
system is sufficient to withstand the defendant's motion to
dismiss); Stackhouse v. DeSitter, 566 F.Supp. 856, 859
(N.D.Ill. 1983) (''Charging a black buyer an unreasonably
high price for a home where a dual housing market exists
due to racial segregation also violates this section . . .'').

74. John D'Antona Jr., Lenders requiring more mortgage

insurance, Pittsburgh Post-Gazette, Feb. 18, 1996, p. J1.

75. Duff & Phelps Credit Rating Co. report on the private
mortgage insurance industry, Dec. 7, 1995. The figure is for

76. No Bump in December MI Numbers, National Mortgage

News, Feb. 5, 1996, p. 2. The figure is as of the end of

77. Charting the Two Paths to Profitability, American Banker,

September 13, 1994, p. 11; Tallying Up Servicing
Performance in 1993, Mortgage Banking, June 1994, p. 12.

78. 15 U.S.C. Section 1692 et seq.

79. 1996 U.S.Dist.LEXIS 3430 (MD Fla., Feb. 23, 1996).

80. One who regularly acquires and attempts to enforce

consumer obligations that are delinquent at the time of
acquisition qualifies as an FDCPA ''debt collector'' with
respect to such obligations. Kimber v. Federal Fin. Corp.,
668 F.Supp. 1480, 1485 (M.D.Ala. 1987); Cirkot v.
Diversified Systems, 839 F.Supp. 941 (D.Conn. 1993);
Coppola v. Connecticut Student Loan Foundation, 1989
U.S.Dist. LEXIS 3415 (D.Conn. 1989); Commercial Service
of Perry v. Fitzgerald, 856 P.2d 58 (Colo.App. 1993).

81. The FDCPA defines as a ''deceptive'' practice -- (2) The

false representation of -- (A) the character, amount, or legal
status of any debt; or 15 U.S.C. Section 1692e. The FDCPA
also prohibits as an ''unfair'' practice the collection or
attempted collection of ''any amount (including any interest,
fee, charge, or expense incidental to the principal obligation)
unless such amount is expressly authorized by the
agreement creating the debt or permitted by law.'' 15 U.S.C.
Section 1692f(1).

82. Bloom v. Martin, 865 F.Supp. 1377 (ND Cal. 1994), aff'd,
77 F.31 318 (9th Cir., 1996). See also, Siegel v. American S.
& L. Ass'n, 210 Cal.App.3d 953, 258 Cal.Rptr. 746 (1989);
and Goodman v. Advance Mtge. Corp., 34 Ill.App.3d 307,
339 N.E.2d 257 (1st Dist. 1981) (state statute construed to
permit charge for recording release, at least where mortgage
is silent).

83. John Lee, John Mancuso and James Walter, Survey:

Housing Finance: Major Developments in 1990,'' 46 Business
Lawyer 1149 (May 1991).

84. Nelson and Whitman, Real Estate Finance Law, Section

11.4 at 816.

85. Thrifts Paying Big Bucks for ARM Errors, American

Banker -- Bond Buyer, May 23, 1994, p. 8; J. Shiver,
Adjustable-Rate Mortgage Mistakes Add Up, Los Angeles
Times, Sept. 22, 1991, p. D3.

86. A Call To Arms on ARMs, Business Week, Sept. 6, 1993,

p. 72.

87. Hubbard v. Fidelity Fed. Bank, 824 F.Supp. 909 (CD Cal.


88. The UCCC has been enacted in Colorado, Idaho, Iowa,

Kansas, Maine, Oklahoma, Utah and Wyoming. It imposes
the same disclosure obligations as T.I.L.A., but does not cap
classwide statutory damages at the lesser of 1 percent of the
net worth of the creditor or $ 500,000.

89. Michaels Building Co. v. Ameritrust Co., N.A., 848 F.2d

674 (6th Cir. 1988); Haroco, Inc. v. American Nat'l Bank &
Trust Co., 747 F.2d 384 (7th Cir. 1984); Morosani v. First
Nat'l Bank of Atlanta, 703 F.2d 1220 (11th Cir. 1983).

90. Systematic overcharging of consumers in and of itself

constitutes an unfair practice violative of state UDAP
statutes. Leff v. Olympic Federal, n. 7 supra
(overescrowing); People ex rel. Hartigan v. Stianos, 131
Ill.App.3d 575, 475 N.E.2d 1024 (1985) (retailer's practice
of charging consumers sales tax in an amount greater than
that authorized by law was UDAP violation); Orkin
Exterminating Co., 108 F.T.C. 263 (1986), aff'd, 849 F.2d
1354 (11th Cir. 1988) (Orkin entered into form contracts
with thousands of consumers to conduct annual pest
inspections for a fixed fee and, without authority in the
contracts, raised the fees an average of $ 40).

91. The usury claim is that charging interest at a rate in

excess of that agreed upon by the parties is usury. See
Howes v. Donart, 104 Idaho 563, 661 P.2d 729 (1983);
Garrison v. First Fed. S. & L. Ass'n of South Carolina, 241
Va. 335, 402 S.E.2d 25 (1991). Each of these decisions
arose in a state which had ''deregulated'' interest rates with
respect to some or all loans. There was no statutory limit on
the rate of interest the parties could agree upon. However,
in each case the court held that a lender that charged more
interest than the parties had agreed to violated the usury

92. Barbara Ballman, Citibank mortgage customers due

refunds on rate ''maladjustments,'' Capital District Business
Review, Apr. 5, 1993, p. 2 ($ 3.27 million); Israel v.
Citibank, N.A. and Citicorp Mortgage, Inc., No. 629470 (St.
Louis County (Mo.) Circuit Court); Englard v. Citibank, N.A.,
Index No. 459/90 (N.Y.C.S.C. 1991).

93. Whitford v. First Nationwide Bank, 147 F.R.D. 135

(W.D.Ky. 1992).

94. ''A call to arms on ARMs,'' Business Week, Sept. 6, 1993,

p. 72.

95. Crowley v. Banking Center, 1994 Conn. Super. LEXIS

3026 (Nov. 29, 1994).

96. LeBourgeois v. Firstrust Savings Bank, 27 Phila. 42,

1994 Phila. Cty. Rptr. 15 (CP 1994).

97. Jacob C. Gaffey, Managing the risk of ARM errors,

Mortgage Banking, Apr. 1995, p. 73.

98. Preston v. First Bank of Marietta, 16 Ohio App. 3d 4, 473

N.E.2d 1210, 1215 (1983).

99. Baxter v. First Bank of Marietta, 1992 Ohio App. LEXIS

5956 (Nov. 6, 1992).

100. Froland v. Northeast Savings, reported in Lender

Liability News, Feb.20, 1996, and American Banker, Jan. 4,
1996, p. 11.



Cooper v. First Gov't Mortgage and Investors Corp.

Lender’s Assignee Who Failed to Show Due Diligence Under Home Ownership and
Equity Protection Act Not Entitled to Summary Judgment

Cooper v. First Gov't Mortgage and Investors Corp. , No. 00-0536 (RMU) (D. D.C.
June 10, 2003)

The district court, denying a motion for summary judgment filed by defendant assignee
of a home mortgage loan, ruled that, to prevail, defendant would have to demonstrate that
it could not reasonably have determined that the Home Ownership and Equity Protection
Act (HOEPA) governed the loan.

Plaintiff homeowners alleged predatory and fraudulent lending tactics in violation of the
Truth in Lending Act (TILA) and HOEPA, as well as District of Columbia statutes. They
contended that, under HOEPA, defendant assignee was liable for all violations asserted
against the original lender.

Moving for summary judgment, defendant argued that it was not liable unless “the
HOEPA status of the loan [was] apparent on the face of the loan documents to a
reasonable person exercising due diligence.” In denying the motion, the court noted
defendant’s designee’s “poor understanding of HOEPA” and its failure to convince the
court that it had conducted the type of search a reasonable person would undertake.

The court also rejected defendant’s motion for summary judgment on plaintiff’s claim
for rescission under TILA. Defendant contended that plaintiff’s written acknowledgment
was undisputed evidence that she received the required two copies of the Notice of Right
to Cancel form and that, in any event, substantial compliance with TILA was sufficient.

The court said that plaintiff’s testimony was sufficient to meet the “low burden” that
TILA plaintiffs faced in overcoming the presumption of delivery and that, since case law
favored strict compliance with TILA, substantial compliance was insufficient.


Whitley v. Rhodes



Chapter 13, Case No. 93-19652-JNF, Adv. P. No. 94-1008



January 24, 1995, Decided

January 24, 1995, Filed






Judges: Joan N. Feeney, United States Bankruptcy Judge

Author of opinion: Joan N. Feeney



The matter before the Court is the Motion for Partial Summary Judgment filed by the
Plaintiff, Chapter 13 Debtor Earle K. Whitley (the "Plaintiff" or the "Debtor"), in his
adversary proceeding against Rhodes Financial Services, Inc. (the "Defendant" or
"Rhodes"), which adversary proceeding was filed on January 6, 1994. In addition to
seeking damages and a determination that he validly rescinded the mortgage held by
Rhodes, the Debtor sought a preliminary injunction against Rhodes to restrain it from
refusing to honor his valid rescission. After notice and a hearing, this Court entered an
order dated January 14, 1994, granting the Debtor's request for a preliminary injunction,
ordering Rhodes to deliver a discharge of the mortgage it held on the Debtor's home, and
requiring counsel to the Debtor and the Defendant to hold the sum of $ 35,000.00 in a
joint escrow account pending a decision on the merits of the adversary complaint.

In response to the Court's order, Rhodes filed a notice of appeal, a motion for leave to
appeal and a motion for a stay pending appeal. Prior to a hearing on the motion for a stay
pending appeal, the parties, on February 18, 1994, filed a stipulation in which Rhodes
agreed to discharge its mortgage on the Debtor's property located at 23 Jacob Street,
Dorchester, Massachusetts and to withdraw its motion for leave to appeal. The parties
also agreed that the Debtor would execute and deliver to Rhodes a mortgage in the
amount of $ 45,000.00 for recordation and that they would establish an escrow account
for net proceeds from the Debtor's refinancing with US Trust, which was anticipated at
the time the stipulation was executed.

Rhodes failed to answer the Debtor's adversary complaint. It filed a voluntary

petition under Chapter 7 on April 7, 1994, and Stephen Gray ("Gray") was appointed
Chapter 7 Trustee. On July 20, 1994, the Debtor moved for relief from the automatic stay
in the Rhodes case to continue the prosecution of his adversary proceeding. Rhodes'
Chapter 7 Trustee assented to the motion. On August 11, 1994, Gray filed an answer to
the Plaintiff's complaint.

On September 7, 1994, the Debtor moved for partial summary judgment against the
Rhodes Chapter 7 estate under the federal Truth in Lending Act, 15 U.S.C.A. § § 1601-
1646 (West 1982 & Supp. 1994) ("TILA"), and the Massachusetts Consumer Credit Cost
Disclosure Act, Mass. Gen. Laws Ann. Ch. 140D, § § 1-34 (West 1991 & Supp. 1994)
("CCCDA"), arguing that the following charges which Rhodes required the Debtor to pay
were conditions of closing the loan and were undisclosed finance charges as defined by

1. a $ 2,954.00 brokerage commission to The Money Tree, Inc., a mortgage broker that
shared Rhodes' address and was managed by the brother of Rhodes' president and sole

2. a $ 25.00 fee to purchase an amortization schedule for a non-amortizing loan;

3. a $ 10.00 fee to record an assignment of the mortgage to a third party;

4. a $ 50.00 fee for updating the title even though Rhodes charged a $ 250 fee for a full
title examination;

5. a portion of the above $ 50.00 fee to record documents even though Rhodes separately
imposed itemized fees which fully covered its recording costs.

Gray, on behalf of the Rhodes estate, responded to the motion for partial summary
judgment, disputing that the five charges outlined by the Debtor were undisclosed finance
charges. The Trustee relied in part on the affidavit of Cheryl White, Rhodes's president
and sole shareholder, which affidavit was filed in conjunction with Rhodes's opposition
to the Debtor's request for a preliminary injunction.
On November 7, 1994, the Court heard the motion for partial summary judgment, as
well as the Plaintiff's motion to strike certain portions of the affidavit of Cheryl White.
During the course of the hearing, the Court granted the Plaintiff's motion to strike the
portion of White's affidavit in which she stated that Rhodes never required the use of The
Money Tree or any other broker in connection with making loans and that Rhodes did not
require the Debtor to use The Money Tree as a broker. The Court found the following
arguments made by the Debtor to be meritorious: 1) that the November 6, 1990 letter
from Ms. White to Mr. Whitley, in which Ms. White outlined the "highlights" of the loan,
including a broker's fee of approximately $ 3,000.00, and legal fees of approximately $
1,500.00, constituted an offer that was accepted by the Debtor; 2) that the "highlights" set
forth in the offer were in fact conditions for making the loan; and 3) that as a result of the
parol evidence rule the affidavit could not be used to contradict the terms of the contract
that resulted from the Debtor's acceptance of Rhodes's offer.

As a result of the Court's ruling, Gray's counsel conceded that a violation of TILA
(and concomitantly CCCDA) had occurred, and the focus of the hearing shifted to the
remedies available to the Debtor. At the conclusion of the hearing, the Court granted the
Plaintiff leave to amend his complaint to detail actual damage claims and ordered the
parties to file supplemental memoranda of law.


The following facts are undisputed. The Debtor has resided at 23 Jacob Street,
Dorchester, Massachusetts with his family of six for the past 16 years. In the fall of 1990,
he responded to an advertisement and applied to The Money Tree for a second mortgage
on his home. The Money Tree submitted his application to Rhodes and, on November 6,
1990, Ms. White, on behalf of Rhodes, wrote to the Debtor, stating the following:

We have tentatively approved your loan; however, it is important you understand certain
terms and conditions that will apply, and may influence your decision in accepting our

The following are the highlights of your loan:

1. Gross amount of loan: $ 32,000.00.

2. Term of loan: 2 years, interest only.

3. Interest rate: Initial rate 16% per annum, then adjustable periodically to prime rate plus
10% per annum, not less than 18% per annum.

4. Origination fee to Rhodes (1%): $ 320.00.

5. Buydown (non-refundable): $ 3,000.00.

6. Broker fee (to The Money Tree): $ 3,000.00.

7. Legal fees (approximately): $ 1,500.00.

8. Resulting A.P.R. (as prepared): 27%.

The Debtor did not sign any loan brokerage or commission agreement with The Money
Tree at any time prior to the loan closing, which took place on November 29, 1990. On
that date, Rhodes, a creditor as defined in 15 U.S.C. § 1602(f) and M.G.L. c. 140D, § 1,
loaned the Debtor $ 31,000.00, secured by a second mortgage on his Dorchester home.

At the closing, the Debtor signed documents entitled "Disclosure Statement" and
"Loan Accounting and Disbursement Authorization." The Disclosure Statement set forth,
among other things, an annual percentage rate of 26.25759%, a finance charge of $
15,710.69, an amount financed of $ 27,543.77, and a total of payments of $ 43,254.46.
The Loan Accounting and Disbursement Authorization set forth the following:

Rhodes Financial Services, Inc.
-Initial Disbursement $
TO: Rhodes Financial Services, Inc. 310.00
TO: Rhodes Financial Services, Inc. 165.23
TO: Stuart H. Sojcher, Esq. 1,040.00
TO: Alan H. Rosenbaum, Esq. 250.00
TO: Alan H. Rosenbaum, Esq. 50.00
TO: Rhodes Financial Services, Inc. 2,981.00
TO: Stuart H. Sojcher, Esq. 195.00
TO: ($ 250.00 P.O.C.) N/A
-Mortgage 25.00
-Assignment of Mortgage 10.00
-Discharge of Mortgage and Liens N/A
TO: The Money Tree, Inc. 2,954.00
TITLE INSURANCE (Lenders and Borrowers)
TO: Lawyers Title Insurance Company 150.00
TO: Stuart H. Sojcher, Esq. 25.00
TO: City of Boston 3,813.16
TO: MacIntyre, Fay & Thayer 452.00
TO: 1st American (FDIC) 7,000.00
TO: U.S.Trust (Windows) 4,599.29
TO: Boston Edison 981.29
TO: Boston Gas 564.18
TO: Earl K. Whitley 5,379.85

On November 30, 1990, Rhodes recorded its mortgage on the Debtor's home. On
December 27, 1990, Rhodes assigned its mortgage to Randal Mortgage Corp.

In mid-summer of 1992, with the two year balloon payment coming due, the Plaintiff
approached Rhodes seeking to convert the short-term loan to a long-term loan. Rhodes
informed the Debtor that it would not make such a loan even though he had regularly
made all his payments.

On January 22, 1993, the Debtor, through his counsel, in a letter addressed to
"Rhodes Financial, Inc." at the correct address in Natick, Massachusetts, informed
Rhodes that he wished to rescind the loan. n1 On February 11, 1993, Rhodes replied to
the letter, through counsel, stating "although we are substantively responding to your
January 22, 1993 letter, we do not concede that it is proper notification under
Massachusetts General laws, Chapter 140D.

n1Although the letter was addressed to Rhodes Financial, Inc., counsel in the first
sentence of his letter, represented that he was representing "a Rhodes Financial Services,
Inc. mortgagor."

In May of 1993, the Plaintiff was selected in a lottery held by US Trust as a

prospective recipient of refinancing monies to be used to save his home. On August 12,
1993, US Trust issued a loan commitment to the Plaintiff for $ 45,000.00, a sum
sufficient to pay off the first mortgage and the principal amount of Rhodes's second
mortgage. The loan closing was scheduled to take place on October 20, 1993. The closing
did not take place, however, because Rhodes demanded $ 41,965.91, as well as a release
of the Plaintiff's claims against Rhodes. Thereafter, Rhodes took steps to foreclose its
mortgage. The Debtor filed a voluntary petition under Chapter 13 of the Bankruptcy
Code on October 27, 1993 to forestall a foreclosure sale.


The Debtor is entitled to summary judgment if "the pleadings, depositions, answers

to interrogatories, and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law." See Fed. R. Civ. P. 56(c), made applicable to this
proceeding by Fed. R. Bankr. P. 7056.


Section 1635 of TILA provides in relevant part the following:

(a) Except as otherwise provided in this section, in the case of any consumer credit
transaction ... in which a security interest ... is or will be retained or acquired in any
property which is used as the principal dwelling of the person to whom credit is extended,
the obligor shall have the right to rescind the transaction until midnight of the third
business day following the consummation of the transaction or the delivery of the
information and rescission forms required under this section together with a statement
containing the material disclosures required under this subchapter, whichever is later, by
notifying the creditor, in accordance with regulations of the Board, of his intention to do

(b) When an obligor exercises his right to rescind under subsection (a) of this section, he
is not liable for any finance or other charge, and any security interest given by the
obligor, including any such interest arising by operation of law, becomes void upon such
rescission. Within 20 days after receipt of a notice of rescission, the creditor shall return
to the obligor any money or property given as earnest money, downpayment, or
otherwise, and shall take any action necessary or appropriate to reflect the termination of
any security interest created under the transaction. If the creditor has delivered any
property to the obligor, the obligor may retain possession of it. Upon the performance of
the creditor's obligations under this section, the obligor shall tender the property to the
creditor, except that if return of the property in kind would be impracticable or
inequitable, the obligor shall tender its reasonable value. Tender shall be made at the
location of the property or at the residence of the obligor, at the option of the obligor. If
the creditor does not take possession of the property within 20 days after tender by the
obligor, ownership of the property vests in the obligor without obligation on his part to
pay for it. The procedures prescribed by this subsection shall apply except when
otherwise ordered by the court....

(f) An obligor's right of rescission shall expire three years after the date of consummation
of the transaction or upon the sale of the property, whichever occurs first....

(g) In any action in which it is determined that a creditor has violated this section, in
addition to rescission the court may award relief under section 1640 of this title for
violations of this subchapter not relating to the right to rescind.

15 U.S.C. § 1635. Section 1640 provides in relevant part the following:

(a) Except as otherwise provided in this section, any creditor who fails to comply with
any requirement imposed under this part, including any requirement under section 1635
of this title or part D or E of this subchapter with respect to any person is liable to such
person in an amount equal to the sum of-

(1) any actual damage sustained by such person as a result of the failure;

(2)(A)(i) in the case of an individual action twice the amount of any finance charge in
connection with the transaction, ... except that the liability under this subparagraph shall
not be less than $ 100 nor greater than $ 1,000 ...; and

(3) in the case of any successful action to enforce the foregoing liability or in any action
in which a person is determined to have a right of rescission under section 1635 of this
title, the costs of the action, together with a reasonable attorney's fee as determined by the

(e) Any action under this section may be brought in any United States district court, or in
any other court of competent jurisdiction, within one year from the date of the occurrence
of the violation....

15 U.S.C. § 1640. CCCDA provisions parallel those of TILA, and, accordingly, "should
be construed in accordance with federal law." Mayo v. Key Financial Services, Inc., No.
92-6441-D, slip op. at 6-7 (Superior Court June 22, 1994). Moreover, the regulations
promulgated under TILA and CCCDA are substantially similar as well. The only
differences are with respect to the statutes of limitation for rescission and damage claims.
Under the CCCDA, an obligor has four years to rescind and four years, rather than one
year, to institute an action for damages. Compare M.G.L. c. 140D, § § 10, 32 with 15
U.S.C. § § 1635(f), 1640(e). As United States Bankruptcy Judge Hillman noted in Myers
v. Federal Home Loan Mortgage Co. (In re Myers), 175 Bankr. 122, 1876, 7, (Bankr. D.
Massachusetts 1994), the Federal Reserve Board has determined that "'credit transactions
subject to the Massachusetts Truth in Lending Act are exempt from chapters 2 and 4 of
the Federal act'", except with respect to certain creditors that are federally chartered
institutions. See 48 Fed. Reg. 14882, 14890 (April 6, 1983). Accordingly, for purposes of
resolving the instant dispute, the only material difference between state and federal law is
the limitation period for rescission and damages claims. Since the Debtor filed his
adversary proceeding within four years of the November 29, 1990 loan closing, his
rescission and damage claims are timely under Massachusetts law.



The Debtor maintains that Rhodes required him to pay a brokerage commission to
The Money Tree as a term and condition of the loan and Rhodes's failure to disclose this
fee as a finance charge violated TILA and CCCDA. Regulation Z, a regulation issued by
the Board of Governors of the Federal Reserve System to implement the Truth in
Lending Act, defines the term finance charge as "... the cost of consumer credit as a
dollar amount. It includes any charge payable directly or indirectly by the consumer and
imposed directly or indirectly by the creditor as an incident to or a condition of the
extension of credit." 12 C.F.R. § 226.4(a). The Official Staff Commentary to Regulation
Z promulgated by the Board further provides that "charges imposed on the consumer by
someone other than the creditor for services not required by the creditor are not finance
charges, as long as the creditor does not retain the charges." Regulation Z, Supplement I-
Official Staff Interpretations, 12 C.F.R. § 226.4(a)(3) (1991). Moreover, charges which
are bona fide and reasonable in amount may be excluded if they relate to any one of the

(i) Fees for title examination, abstract of title, title insurance, property survey, and similar

(ii) Fees for preparing deeds, mortgages, and reconveyance, settlement, and similar

(iii) Notary, appraisal, and credit report fees.

(iv) Amounts required to be paid into escrow or trustee accounts if the amounts would
not otherwise be included in the finance charge.

Regulation Z, 12 C.F.R. § 226.4(c)(7).

According to the Debtor, since brokers' fees are not contained in any of the
exclusions of Regulation Z with respect to finance charges, they constitute a finance
charge. The Trustee argues that Rhodes did not require the Debtor to use the services of
The Money Tree, relying upon the affidavit of Ms. White. Since the Court determined on
November 7, 1994 that Rhodes cannot rely upon that affidavit as a result of the parol
evidence rule, see Thomas V. Christensen, 12 Mass. App. Ct. 169, 176, 422 N.E.2d 472
(1981); Trustees of Tufts College v. Parlane Sportsware Co., Inc., 4 Mass. App. Ct. 783,
342 N.E.2d 727 (1976); see also Baker v. Rapport, 453 F.2d 1141 (1st Cir. 1972); Wier
v. Texas Co., 79 F. Supp. 299 (W.D. La. 1948), aff'd, 180 F.2d 465 (1950), the Court
finds that Rhodes required the services of The Money Tree and $ 2,954.00 should have
been disclosed as part of the finance charge.

Rhodes also required the services of attorneys. Attorneys' fees for preparing deeds,
mortgages, settlement sheets and similar documents are excluded from the finance
charge. Likewise, fees for title examinations are excluded. However, these fees must be
"bona fide and reasonable in amount." Regulation Z, 12 C.F.R. § 226.4(c)(7). The Court
finds that the $ 25.00 charge for the preparation of an amortization schedule for a non-
amortizing loan was an unreasonable, indeed an egregious, fee that should have been
included in the finance charge.

The $ 10.00 recordation fee for Rhodes's assignment of the mortgage to Randal
Mortgage Corporation is not a charge that can be excluded from the finance charge as it
pertained to a separate transaction that did not involve the Debtor. Regulation Z provides
in relevant part that "the finance charge includes ... charges imposed on a creditor by
another person for purchasing or accepting a consumer's obligation, if the consumer is
required to pay the charges in cash, as an addition to the obligation, or as a deduction
from the proceeds of the obligation." See 12 C.F.R. § 226.4(b)(6). Pursuant to the plain
language of the state and federal regulations, the future assignment fee was not
excludable from the finance charge and resulted in the finance charge being understated.
See Mayo v. Key Financial Services, Inc. No 92-6441-D, slip op. at 6-7 (Superior Court
June 22, 1994), citing In re Brown, 106 Bankr. 852, 858-59 (Bankr. E.D. Pa. 1989);
Cheshire Mortgage Service, Inc. v. Montes, 223 Conn. 80, 100-101, 612 A.2d 1130

The Debtor objects to the $ 50.00 lump sum charge for updating the title and
recording documents, citing the Commentary to Regulation Z, which provides: "If a lump
sum is charged for several services and includes a charge that is not excludable from the
finance charge under Regulation Z, § 226.4(c)(7), a portion of the total should be
allocated to that service and included in the finance charge." The Debtor maintains that a
charge for updating the title is unreasonable because he was also charged $ 250.00 for a
"full" title examination and any portion of the same $ 50.00 charge relating to recording
documents cannot be excluded from the finance charge because Rhodes separately
charged for all compensable recording fees.

The Trustee responds with the observation that the $ 50.00 lump sum charge related
to attorney's fees for a title update, which he maintains was prudent in view of the
Debtor's financial history, and to time actually spent transporting documents to the
Registry for recordation. From the existing record, the Court is unable to determine
whether a portion of the $ 50.00 was spent on actual recording fees, in which case that
portion would be part of the finance charge, as only the second mortgage itself was
recorded for a $ 25.00 fee, or whether all of or only a portion of the charge was for
attorney's fees. The Court also has no evidence as to what customary and reasonable
attorney's fees were in 1990 with respect to full title examinations and whether there was
anything unusual or complicated about the state of the Debtor's title that would warrant
additional attorney time. Accordingly, based upon the existing record, the Court cannot
find that this $ 50.00 charge was an undisclosed finance charge and that a material
misrepresentation of the finance charge occurred because of Rhodes's treatment of this
In view of the foregoing discussion, the Court grants the Debtor's Motion for Partial
Summary Judgment in so far as it seeks a determination that $ 2,989.00 of the sums
disbursed at the closing constituted undisclosed finance charges.


1. The Amended Complaint

In his Amended Complaint, the Debtor seeks the following forms of relief: 1) a
declaration that the Plaintiff validly rescinded the transaction, that the Defendant's
security interest is void and the Defendant's secured claim is disallowed; 2) a declaration
that the Defendant's failure to honor the Plaintiff's valid rescission notice in accordance
with the dictates of 15 U.S.C. § 1635 and M.G.L. c. 140D, § 10 vests in the Plaintiff the
right to retain the net loan proceeds and that the Defendant has no allowable unsecured
claim; 3) an order requiring the discharge of the second mortgage; 4) an order requiring
the Defendant to refund to the Plaintiff all money paid to the Defendant in connection
with the transaction; 5) an award of $ 1,000.00 in statutory damages for the Defendant's
failure to comply with 15 U.S.C. § 1638 and M.G.L. c. 140D, § 12, and an award of an
additional $ 1,000.00 in statutory damages for the Defendant's failure to comply with 15
U.S.C. § 1635(b) and M.G.L. c. 140D, § 10(b); 6) actual damages; and 7) reasonable
attorney's fees and costs.

2. Positions of the Parties

a. The Debtor

The Debtor relies upon the plain language of Regulation Z, which sets forth the
effects of rescission as follows:

(1) When a consumer rescinds a transaction, the security interest giving rise to the right
of rescission becomes void and the consumer shall not be liable for any amount,
including any finance charge.

(2) Within 20 calendar days after receipt of a notice of rescission, the creditor shall return
any money or property that has been given to anyone in connection with the transaction
and shall take any action necessary to reflect the termination of the security interest.

(3) If the creditor has delivered any money or property, the consumer may retain
possession until the creditor has met its obligation under paragraph (d)(2) of this section.
When the creditor has complied with that paragraph, the consumer shall tender the money
or property to the creditor or, where the latter would be impracticable or inequitable,
tender its reasonable value.... Tender of money must be made at the creditor's designated
place of business. If the creditor does not take possession of the money or property within
20 calendar days after the consumer's tender, the consumer may keep it without further

(4) The procedures outlined in paragraphs (d)(2) and (3) of this section may be modified
by court order.

Regulation z, 12 C.F.R. § 226.23(d)(1)-(4). See also 15 U.S.C. § 1635(b) and M.G.L. c.

140D, § 10(b).

The Debtor, relying upon Myers v. Federal Home Loan Mortgage Co. (In re Myers),
175 Bankr. 122, 1876 (Bankr. D. Mass. 1994), and cases cited therein, argues that
Rhodes's security interest was void upon receipt of the rescission notice, and this effect of
rescission cannot be conditioned or modified by the Court. Accordingly, the Debtor
argues that, at best, Rhodes's Chapter 7 estate has an unsecured claim against the Debtor's
estate. Additionally, he argues that pursuant to either section 1635(b) of TILA or section
10(b) of CCCDA and the applicable state and federal regulations, Rhodes forfeited its
right to the return of any of the loan proceeds. In other words, the Debtor maintains 1)
that he had no obligation to tender because Rhodes, after receipt of the notice of
rescission, failed to return to him "any money or property given as earnest money or
down payment;" and 2) that he did indeed "tender" $ 31,000.00 to Rhodes, which tender
was refused.

The Debtor also argues that this Court should use its modification powers to vest the
loan proceeds in him, even if the Court were to rule that the proceeds of the Rhodes loan
have not explicitly vested in him due to Rhodes' failure to accept tender (or, as this Court
observes, because the Debtor did not actually tender the proceeds to Rhodes at its usual
place of business in conformance with Regulation Z). The Debtor emphasizes Rhodes's
predatory lending practices set forth in the amicus brief filed by the Commonwealth.

Finally, the Debtor seeks the full panoply of damages available to him under TILA
and CCCDA. n2 In particular, the Debtor seeks actual damages consisting of an
unspecified amount of interest that he was compelled to pay US Trust on the additional
funds he was forced to borrow and place into escrow because of Rhodes' actions and
undisclosed finance charges which this Court has determined to be $ 2,989.00. He also
seeks a second statutory damage award in the amount of $ 1,000.00, citing Aquino v.
Public Finance Consumer Discount Co., 606 F. Supp. 504 (E.D. Pa. 1985), as well as
unspecified costs and attorney's fees. See also In re Michel, 140 Bankr. 92, 101 (Bankr.
E.D. Pa. 1992) ($ 1,000.00 awarded to debtors for lender's refusal to honor valid
rescission, plus reasonable attorney's fees pursuant to 15 U.S.C. § 1640(a)(3)).

n2 As the court recognized in Myers, slip op. at 8, unlike TILA, the CCCDA does
not have a one year statute of limitations for damage claims.

b. Chapter 7 Trustee of the Rhodes Estate

The Trustee's position is succinctly stated in his memorandum as follows:

In this case, the equities clearly favor allowing the Trustee to maintain at least an
unsecured claim against the Plaintiff's Estate. This is not a proper case to force
compliance with TILA's requirements or provide an incentive for a creditor to comply
with TILA. In this case, Rhodes has already filed bankruptcy, thus, any of the remedial
and punitive policies of TILA will have no impact on Rhode's [sic]future lending
policies. Rather, the harsh remedies will only harm other creditors of Rhodes. If this
Court is to allow rescission, it should condition the rescission on the Plaintiff returning all
proceeds he received from the loan to the Trustee or, alternatively, allowing the Trustee
an unsecured claim against the Plaintiff's Estate.

Supplemental Memorandum in Support of Trustee's Opposition to Plaintiff's Motion for

Partial Summary Judgment. The Trustee's position is not without support. See, e.g.,
Williams v. Homestake Mortgage Co., 968 F.2d 1137 (11th Cir. 1992); Brown v. Nat'l
Permanent Fed. Sav. & Loan Ass'n, 221 U.S. App. D.C. 125, 683 F.2d 444 (D.C. Cir.
1982); Powers v. Sims and Levin, 542 F.2d 1216 (4th Cir. 1976); New Maine Nat'l Bank
v. Gendron, 780 F. Supp. 52 (D. Me. 1991); In re Lynch, 170 Bankr. 26 (Bankr. D. Me.
1994); In re Cox, 162 Bankr. 191 (Bankr C.D. Ill. 1993); In re Foster, 105 Bankr. 67
(Bankr. N.D. Okla. 1989).

In Homestake, a case relied upon by the Maine Bankruptcy Court in Lynch, the Court
of Appeals for the Eleventh Circuit considered 15 U.S.C. § 1635 (b) and 12 C.F.R. §
226.23(d)(1)-(4), while recognizing that "the sequence of rescission and tender set forth
in § 1635(b) is a reordering of common law rules governing rescission. It noted the

Under common law rescission, the rescinding party must first tender the property that he
has received under the agreement before the contract may be considered void. Once the
rescinding party has performed his obligations, the contract becomes void and the
rescinding party may then bring an action in replevin or assumpsit to insure that the non-
rescinding party will restore him to the position that he was in prior to entering into the
agreement, i.e., return earnest money or monthly payments and void all security interests.
Under § 1635(b), however, all that the consumer need do is notify the creditor of his
intent to rescind. The agreement is then automatically rescinded and the creditor must,
ordinarily, tender first. Thus, rescission under § 1635 'place[s]the consumer in a much
stronger bargaining position than he enjoys under the traditional rules of rescission.'
Furthermore, because rescission is such a painless remedy under the statute [placing all
burdens on the creditor], it acts as an important enforcement tool, insuring creditor
compliance with TILA's disclosure requirements.

Though one goal of the statutory rescission process is to place the consumer in a
much stronger bargaining position, another goal of § 1635(b) is to return the parties most
nearly to the position they held prior to entering into the transaction. The addition of the
last sentence of § 1635(b), stating that 'the procedures prescribed by this subsection shall
apply except when otherwise ordered by the court,' was added by the Truth in Lending
Simplification and Reform Act ... and is a reflection of this equitable goal.

Id. The court, while citing Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 565, 63 L.
Ed. 2d 22, 100 S. Ct. 790 (1980), then considered and rejected the obligor's argument that
the Federal Reserve Board Staff Interpretations construing TILA and Regulation Z
should be dispositive. It stated the following:

[The obligor] reads this section of the regulations to mean that 'the court modification
provision in subsection (d)(4) applies only to subsections (d)(2) and (d)(3) and does not
apply to the first step of the rescission process, given in subsection (d)(1). ... Thus,
according to Williams [the obligor], the voiding of the creditor's security interest, which
Williams argues is guaranteed by the mandate of subsection (d)(1), may not be
conditioned on the consumer's tender. Although this is technically correct, it is not a
realistic recognition of the full scope of the statutory scheme....

Where 'the intent of Congress is clear, that is the end of the matter; for the court, as
well as the agency, must give effect to the unambiguously expressed intent of Congress.'
In this instance, Congress, through its legislative history, has made it quite clear that 'the
courts, at any time during the rescission process, may impose equitable conditions to
insure that the consumer meets his obligations after the creditor has performed his
obligations as required by the act.' Furthermore, the plain language of § 1635(b) leaves
little room for narrowing the court's ability to modify the process of effecting rescission,
as Congress' grant of authority covers all 'procedures prescribed by [the]subsection.'
Thus, we hold that a court may impose conditions that run with the voiding of a creditor's
security interest upon terms that would be equitable and just to the parties in view of all
surrounding circumstances.
Id. at 1141-42 (citations omitted, footnote omitted). Thus, the Court of Appeals for the
Eleventh Circuit concluded that TILA as amended gives courts the authority to
restructure loans in ways that could range from ordering the immediate return of the full
principal to leaving the creditor with its state law rights to requiring the execution of
substitute security instruments based upon such considerations as the severity of the
TILA violations and the creditor's ability to repay. Id. at 1142 n.9.

The legislative history of TILA indicates that "a court is authorized to modify this
section's [section 1635(b)]procedures where appropriate", see S.Rep No. 96-368, 96th
Cong., 1st Sess. 29 (1979), reprinted in 1980 U.S. Code Cong. & Ad. News 236, 264-65
(emphasis supplied). Regulation Z, which regulation the United States Supreme Court
has determined to be dispositive unless "demonstrably irrational," Milhollin, 444 U.S. at
556, was effective in April of 1981 and amended in March of 1982, after the enactment
of the Truth in Lending Simplification and Reform Act. It breaks down the provisions of
section 1635(b) into four parts, only two of which are subject to the discretion of courts.
Courts following the reasoning of Homestake reject the import of Regulation Z to the
extent that it purports to limit the discretion courts have to condition or modify the effect
of a customer's notice of rescission, namely the voiding of any security interest.

This Court need not decide whether it lacks the ability to condition rescission on a
customer's tender because in this case the Court chooses not to condition rescission and
to follow the position espoused by the court in Myers: "rescission by an obligor is not
conditioned by tender or payment in the context of a bankruptcy case." Myers, slip op at
13. Cf. In re Holland, No.93-19496-JNF, 2133 (Bankr. D. Mass. December 21, 1994).

In Myers, Bankruptcy Judge Hillman adopted the reasoning advanced by the district
court in In re Celona, 98 Bankr. 705, 707 (E.D. Pa. 1989), a case in which the court
stated that "'judicial preconditioning of cancellation of the creditor's lien on the
customer's tender is inappropriate in bankruptcy cases.'" This Court can conceive of
circumstances where the statutory right to rescind might be conditioned upon an obligor's
tender based upon equitable considerations, in which case a determination as to whether
the effect of a rescission notice is a substantive right not subject to discretionary action or
a procedural step subject to the last sentence of section 1635(b); however, this case is not
one of them. n3 As the court stated in Aquino v. Public Fin. Consumer Discount Co., 606
F. Supp. 504 (E.D. Pa. 1985), "courts in their effort to insure a just result should not
forget that the TILA 'was passed primarily to aid the unsophisticated consumer'" and that
it was "'intended to balance scales thought to be weighted in favor of lenders and ... to be
liberally construed in favor of borrowers.'" Id. at 509, citing Thomka v. A.Z. Chevrolet,
Inc., 619 F.2d 246, 248 (3d Cir. 1980), and Bizier v. Globe Financial Services, Inc., 654
F.2d 1, 3 (1st Cir. 1981).

n3 The Court notes and it is undisputed that the Commonwealth of Massachusetts,

through the Attorney General, commenced an action against Rhodes, The Money Tree
and Randolph Lee White, II, alleging that they engaged in unfair and deceptive lending
and brokerage practices and preyed on unsophisticated Massachusetts consumers.

The Court finds that the Debtor's notice of rescission was valid (the omission of the
words "Services" in the address preceding the salutation was harmless as Rhodes was
correctly identified in the first sentence of the rescission letter). Accordingly, upon
receipt of the notice, the mortgage was void, and Rhodes's claim became an unsecured
claim. See Regulation Z, 12 C.F.R. § 226.23(d)(1). Since the rescission notice was
transmitted to Rhodes approximately nine months prior to the bankruptcy filing, Rhodes
had at best an unsecured claim on the petition date. The Court takes judicial notice that
Rhodes was listed as a creditor on the Debtor's schedules and matrix and received notice
of the section 341 meeting of creditors, as well as the March 21, 1994 deadline for filing
proofs of claim. Rhodes did not file a proof of claim. Accordingly, the Trustee's
unsecured claim against the Debtor is disallowed pursuant to 11 U.S.C. § 502. See also
Fed. R. Bankr. P. 3002(c).


In accordance with the foregoing, the Court grants the Debtor's Motion for Partial
Summary Judgment. The Court finds that the Debtor shall have an unsecured claim
against the Rhodes estate comprised of the following: 1) statutory damages in the amount
of $ 2,000.00, see M.G.L. c. 140D, § 32(a)(2)(a) ($ 1,000.00 for material nondisclosures
and $ 1,000.00 for failure to honor the valid rescission notice); and 2) actual damages in
the amount of costs equal to the amount of interest paid on the sum borrowed from US
Trust and costs and reasonable attorney's fees incurred in conjunction with the TILA and
CCCDA violations, Id. § 32(a)(3). The Court also finds that the Debtor is entitled to an
unsecured claim against the Rhodes's estate equal to the amount of money he paid during
the two years the loan was in good standing, an amount he estimates at approximately $
18,000. n4

n4 Rhodes's Trustee would at most have an unsecured claim against the Debtor's
estate in the amount of $ 22,789.77, representing the proceeds which the Debtor had at
his disposal following the closing ($ 5,379.85) plus the total amount of proceeds used to
procure insurance and to satisfy outstanding obligations owed by the Debtor at the time
of the closing. Even assuming Rhodes's Trustee were to obtain an allowed claim against
the Debtor's estate, its only effect would be to delimit the Debtor's unsecured claim
against the Rhodes estate, since the Debtor's claim against the Rhodes estate likely will
exceed any claim the Trustee would have against the Debtor as attorney's fees and costs
are likely to exceed $ 3,000.00.

The Court hereby orders the Debtor and his attorney to file the following within 20
days of the date of this order: 1) a statement indicating the precise amount of payments
made by the Debtor to Rhodes prior to the filing of his Chapter 13 petition; 2) a statement
as to the interest paid by the Debtor on account of monies borrowed from US Trust; and
3) a fee application in conformance with Local Rule 34.

By the Court,

Joan N. Feeney

United States Bankruptcy Judge

Dated: January 24, 1995


In accordance with the Memorandum dated January 24, 1995, the Court grants the
Debtor's Motion for Partial Summary Judgment. The Court finds that the Debtor shall
have an unsecured claim against the Chapter 7 estate of Rhodes Financial Services, Inc.
comprised of the following: 1) statutory damages in the amount of $ 2,000.00, see Mass.
Gen. Laws Ann. Ch. 140D, § 32(a)(2)(a) (West 1991 & Supp 1994) ($ 1,000.00 for
material nondisclosures and $ 1,000.00 for failure to honor the valid rescission notice);
and 2) actual damages in the amount of costs equal to the amount of interest paid on the
sum borrowed from US Trust and costs and reasonable attorney's fees incurred in
conjunction with violations of the Massachusetts truth in lending law, Id. § 32(a)(3). The
Court also finds that the Debtor is entitled to an unsecured claim against the estate of
Rhodes Financial Services, Inc. equal to the amount of money he paid during the two
years the loan was in good standing, an amount he estimates at approximately $ 18,000.
The Court hereby orders the Debtor and his attorney to file the following within 20 days
of the date of this order: 1) a statement indicating the precise amount of payments made
by the Debtor to Rhodes Financial Services, Inc. prior to the filing of his Chapter 13
petition; 2) a statement as to the interest paid by the Debtor on account of monies
borrowed from US Trust; and 3) a fee application itemizing legal services rendered in
conformance with Local Rule 34.

By the Court,

Joan N. Feeney

United States Bankruptcy Judge

Dated: January 24, 1995


Maxwell v. Fairbanks


…Nevertheless, Fairbanks in a shocking display of corporate irresponsibility repeatedly

fabricated the amount of the debtor’s obligation to it out of thin air. There is no other
explanation for the wildly divergent figures it concocted in correspondence with the
Debtor and her agents and in pleadings and documents filed with the bankruptcy court.
Judge Joan Feeney from her memorandum supporting her order in favor of the debtor. 1

The Community Enterprise Project (“CEP”) of the Hale and Dorr Legal Services

Center (“The Center”) regularly receives calls from low-income homeowners facing

foreclosure. Tara Twomey, who came to the Center as a Skadden Fellow in 1999,

responds to these calls, which are frequently referred by local community groups.

Aware that many of these callers have been victims of unscrupulous lending practices,

Ms. Twomey has developed a protocol for scrutinizing her client’s loans for violations of

federal and state statutes that protect consumers against dishonest and illegal lending

practices by mortgage brokers, lenders and their agents. Eighty-three year old Ms.

Maxwell was one such client.

See in Re: Maxwell, Chapter 13 Case No. 00-14283-JNF; Adv.P No. 00-1568, July 16, 2002. (There is
also a regular BR cite for this case)
In 1977, Ms. Maxwell purchased her Dorchester home for thirty thousand

dollars. Her original mortgage was a 30-year fixed rate loan at 8.5% with monthly

payments of $207.63. In 1988, Ms. Maxwell was approached by a door-to-door salesman

who suggested a variety of home repairs including the installation of new vinyl siding

and windows. The salesman referred Ms. Maxwell and her granddaughter to ITT

Financial Services (ITT), a subsidiary of Aetna Finance, to finance the repairs and

consolidate other outstanding loans. In 1988, Ms. Maxwell received a 15-year fixed rate

loan with an Annual Percentage Rate (“APR”) of 16.78% from ITT in the principal

amount of $137, 611.01. In 1991, ITT refinanced its 1988 loan and provided Ms.

Maxwell and her granddaughter a new loan which ITT said would lower their monthly

payments. However, the new five-year loan had a principal amount of $149,150.00 with

an APR of 16%. The 1991 loan was also negatively amortized, that is, the balloon

payment due at the end of the five years was greater than the principle amount of the

loan. The monthly payment of $2005.71 constituted 98.5% of Ms. Maxwell and her

granddaughter’s combined incomes.

Predictably, it was not long before Ms. Maxwell and her granddaughter realized

that they could not make the monthly payments. Afraid of losing her home, Ms. Maxwell

contacted ITT who agreed to lower the monthly payments to $800, failing, however, to

explain to Ms. Maxwell and her granddaughter that these reduced payment would result

in further negative amortization and increase the amount of the balloon payment when it

became due. In 2001, Fairbanks Capital Corporation, who claimed to be an assignee of

the ITT loan, initiated foreclosure proceedings against Ms. Maxwell and her

granddaughter. At the time, Fairbanks claimed that Ms. Maxwell owed approximately


Ms. Twomey’s involvement in this case began after Ms. Maxwell had filed her

own Chapter 13 bankruptcy petition to prevent a scheduled foreclosure. She did not,

however, file the required schedules or a Chapter 13 plan. In July 2000, facing the

dismissal of her case and a motion from the bank to proceed with its foreclosure, Ms.
Maxwell came to the Legal Services Center. The initial assessment of the case was bleak,

in part, due to the lack of documentation for the loan and Ms. Maxwell’s vague memory.

As the story unfolded, it became apparent, however, that Ms. Maxwell and her

granddaughter had been victims of predatory lending practices.

Ms. Twomey first obtained an extension of time to submit Ms. Maxwell’s

remaining schedules and with the assistance of law students, Claire Connolly and David

Dologite, from the Center’s summer program, began researching potential defenses to

Fairbanks’ motion to proceed with the foreclosure. The strongest argument to emerge

centered on Fairbanks’ Lost Note Affidavit. Fairbanks, who did not have the original

note, or even a copy, had proceeded against Maxwell on a Lost Note Affidavit. The

initial review of the Lost Note Affidavit submitted to the court revealed technical

deficiencies. Among other things, the affidavit was dated prior to the date that Fairbanks

claimed to have acquired the note. This defense was sufficient to delay the hearing on

the Fairbanks’ motion and provided Ms. Twomey with more time to develop the case. In

November 2000, Ms. Twomey filed an adversary complaint in bankruptcy court on Ms.

Maxwell’s behalf asserting nine causes of action, including violations of Truth-in-

Lending (TILA) violations, Real Estate Settlement Procedures Act (RESPA), Fair Debt

Collection Practices Act (FDCPA), Massachusetts Consumer Credit Cost Disclosure Act,

(MCCDA) and Massachusetts Consumer Protection Act. On May 9, 2002, Judge Feeney

heard arguments on the parties cross-motions for summary judgment on four of the nine

counts, FDCPA, RESPA, MCCCDA and unconscionability.

In an order and Memorandum dated July 16, 2002, Judge Feeney granted partial

summary judgment in favor of Ms. Maxwell finding violations of the Fair Debt

Collection Practices Act, the Real Estate Settlement Procedures Act, and the

Massachusetts Consumer Credit Cost Disclosure act. In her stinging opinion, Judge

Feeney also held that “The 1991 transaction was unconscionable and [took] notice that it

and the 1988 transaction satisf[ied], in all material respects, the paradigm of predatory

lending”. In holding that the 1991 transaction was unconscionable and that ITT had
failed to provide Ms. Maxwell and her granddaughter the required disclosures under

MCCDA, Judge Feeney stated that Ms. Maxwell would be entitled to rescind the loan by

way of recoupment.2

Following this decision, the case was resolved favorably in an out-of-court

settlement. Ms. Maxell remains in her home, the mortgage was discharged, and she

received an additional $50,000 from Fairbanks. For its work, the Center was paid

$75,000 in attorney’s fees.


Merriman vs Benificial






The Truth in Lending Act (“TILA”) is applicable to both of these proceedings

because both proceeding involve non-purchase money loans secured by the consumer-
borrowers’ homes (principal dwellings). TILA violations are measured by a strict
liability standard so even minor or technical violations impose liability on a creditor and a
borrower can prevail without showing damages.

Case No. 01-42851-13; Adv. No. 01-7142

Patricia Joan Merriman (“Merriman”) filed a Chapter 13 petition in October

2001. One month later her attorney sent Beneficial Mortgage Co. of Kansas
(“Beneficial”) a notice that Merriman was exercising her right to rescind the contract.
Beneficial did not consider Merriman’s rescission to be effective since it was beyond the
three-day rescission period.

Merriman maintained that the notice of rescission was adequate and timely.
Merriman argued that due to Beneficial’s failure to provide Merriman with the two
copies of her right to rescind the transaction, the time frame for rescinding the transaction
was extended from three-days to three years. See holding #1.

“Recoupment is the common law doctrine that resurrects countervailing claims, which
otherwise could not have been raised. The reasoning is that if recoupment claims are barred by
the relevant statute of limitations, lenders could avoid the legal consequences of their actions by
simply waiting until the expiration of the relevant limitations period to sue on the borrower’s
default, thereby frustrating fundamental policies of debtor/creditor regulation. Allowing a
creditor to profit from a violation of the law simply because the consumer’s limitations period
had passed, but the creditor’s had not, would obstruct the purposes of the law.
Merriman also maintained that the notice of the rescission was ineffective
because the notice was insufficient to inform her of her rescission rights. The form that
Beneficial provided Merriman combined the two model forms produced by the Federal
Reserve Board for New Loan Financing and Refinancing into one form. The information
on the Fed forms was contained on Beneficial’s form, but because Beneficial had
combined the two forms, it had two boxes that related to the two types of financing.
Beneficial’s employee was required to check the appropriate box on the form indicating
the type of financing the borrower had obtained. Beneficial checked neither box, and in
Merriman’s case she had a pre-existing loan with Beneficial, which made the form
confusing. Merriman argued that because the form was confusing, Beneficial had not
provided her with sufficient notice of her right to rescind and therefore the time frame to
rescind should be extended from three-days to three years based on lack of notice. See
holding #2.

Case No. 01-42119-13; Adv. No. 01-7122

Marcelino Emelio Ramirez and Toni Lee Ramirez (“Debtors”) filed a joint Chapter 13
bankruptcy. Approximately one month after filing the petition Debtors sent a timely
notice of rescission to Household Finance Corp. III (“Household”).

Prior to their filing, in February 2000, Mr. Ramirez borrowed money from Household
and signed a promissory note. Debtors then signed a mortgage on their principal dwelling
to secure the note. Household only gave notice of the right to rescind to Mr. Ramirez,
even though Household was required under the TILA to provide notice to both Mr. and
Mrs. Ramirez. Despite the failure to provide notice as required by TILA, the Court held
that the appropriate remedy was not to void the mortgage, but to off-set the amount owed
by the closing costs and all amounts paid on the loan. See holding #3.


1. The fact that Beneficial had allegedly failed to provide two copies of the
right to rescind form to Merriman did not extend the rescission period from three-days to
three years. The second physical copy of the notice was not actually necessary to inform
Merriman of her right to rescind so long as she had one copy. The Court reasoned that as
long as the notice was otherwise sufficient the second physical copy, intended to be kept
solely for the borrower’s records, could have been easily reproduced by photocopying the

2. Beneficial’s failure to check the appropriate box indicating the type of

financing transaction that Merriman could rescind made the form confusing and rendered
the notice insufficient, and therefore the time period to rescind the transaction was
extended from three-days to three years, under TILA.

3. The Court followed Quenzer III and ruled that the Court has the ability to
alter the remedy for TILA violations based on the facts in front of the Court. The Court
noted in its ruling the fact that a majority of courts have refused to enforce the automatic
voiding of the creditor’s mortgage thereby altering the remedy for violations. The Court
refused to void the mortgage liens, and altered the amounts secured by the liens
remaining in place by deducting the closing costs and payments made on the loan from
the amount of the secured claims. The Court also noted that the parties had expressed
their intentions to appeal any adverse ruling and therefore, a decision based on Quenzer
III would allow for swifter access to the Circuit.

LegalAid GA is a project of Atlanta Legal Aid Society, Georgia
Legal Services Program and the Pro Bono Project of the
State Bar of Georgia. The project is funded by the Legal
Services Corporation and the Georgia Access to Justice
Project and produced in cooperation with Pro Bono Net, the
Carl Vinson Institute of Government and legal service
organizations and government agencies throughout Georgia
and the United States.
by: Atlanta Legal Aid Society


Atlanta Legal Aid Society

Last Reviewed: November 2003

Atlanta Legal Aid's Bill Brennan, as one of the nation's

experts on predatory lending, was asked by Senator
Grassley to testify at the Senate Special Committee on Aging
hearing on "Equity Predators: Stripping, Flipping, and
Packing Their Way to Profits." Bill was warmly received and
several Senators made statements at the hearing indicating
the value they placed on legal service program involvement
in this area. Bill's testimony (see text below) clearly outlines
the problems of predatory lending and equity theft, how
victims are targeted, and some historical perspective. An
Exhibit (updated in September 2000) presented to the
Committee details how these scams work.

Bill was quoted in the New York Times, December 13, 1997
in an article about lending practices. "We have financial
apartheid in our country. We have low-income, often
minority borrowers, who are charged unconscionably high
interest rates, either directly or indirectly through the cover
of added charges."

Testimony of William J. Brennan, Jr., Director,

Home defense program of the Atlanta Legal Aid
Society, Inc. before the committee on banking and
financial services, United States house of
May 24, 2000

Thank you for this opportunity to address the United States

House Committee on Banking and Financial Services on the
subject of predatory mortgage lending practices directed
against elderly, minority, low and moderate income, and
women homeowners. My name is William J. Brennan, Jr.
For almost 32 years, I have been a staff attorney at the
Atlanta Legal Aid Society, Inc. specializing in housing and
consumer issues. For the past 12 years, I have served as
the director of the Home Defense Program of the Atlanta
Legal Aid Society.
Over the years, the Home Defense Program has provided
referrals and legal representation to hundreds of low and
moderate income homeowners and home buyers who have
been victimized by home equity and home purchase scams,
including predatory mortgage lending. The Program is
funded by the Atlanta Legal Aid Society and the DeKalb
County, Georgia, Department of Human and Community
Development with HUD community development block grant
funds. The Program consists of myself, a staff attorney, and
a paralegal.

On a daily basis, we assist individual homeowners who have

been targeted by local and national companies with abusive,
predatory mortgage lending practices. We evaluate their
cases to determine whether legal claims exist. We settle
some cases without litigation and litigate others. Most often,
because of our limited resources, we assist homeowners in
obtaining private attorneys to represent them in cases where
the homeowners may have legal claims. Where appropriate,
we also refer homeowners to local nonprofit housing
counseling and other agencies which assist them in obtaining
refinancing of their high cost mortgage loans through low
cost, conventional mortgage lenders or other special
programs. We refer many senior citizen homeowners for
reverse mortgages. We also participate on a regular basis in
a range of community education efforts aimed at warning
home buyers and homeowners against home equity theft
scams, including abusive mortgage lending practices.

When homeowners come to the Home Defense Program with

sub prime mortgage loans, my job is to conduct an
investigation and determine whether they have any legal
claim. In a few cases, a strong legal claim exists that will
result in a settlement that cancels the mortgage. In other
cases, legal claims exist that will result in a settlement that
may give the homeowner some cash and a restructured
mortgage loan with a lower balance, lower interest rate, and
lower monthly payments that the homeowner can afford. In
too many cases, the loan is full of predatory and abusive
lending terms, but I can find no legal claim. Homeowners
who are not eligible for a reverse mortgage or low cost
refinance are bound to those high cost, abusive mortgages
with no legal recourse. When they cannot make the
payments, they go into default and lose their homes and all
their equity.

The financial services industry (including banks and thrifts,

local and national, large and small mortgage lenders and
finance companies) has evolved a system of financial
apartheid in our country. Many people with A credit are
provided with fairly low cost loan products with little or no
abusive practices. On the other hand, people with B and
especially C and D credit (and some of those with A credit)
are often egregiously overcharged and subjected to abusive
lending practices. Moreover, these high cost, abusive loan
products are marketed disproportionately among our elderly,
minority, and low and moderate income communities. The
rationale that risk justifies exploitation is bogus. As
Philadelphia Community Legal Services attorney Irv
Ackelsberg points out, it is as though society has dealt with
the problem of inadequate access to productive credit by
drowning low income households in destructive debt.

Devastating Impact on Individuals, Families and


The impact of predatory mortgage lending has been

devastating on individuals, families and communities.
Because these mortgages are grossly overpriced and contain
abusive, predatory terms that further drive up the cost,
many families are struggling to make their monthly
mortgage payments. Too often they forego paying for other
important necessities such as food, medicine, utilities, and
property taxes in order to keep their homes. When they fall
behind on the mortgage payments, they face foreclosure.
Many inevitably lose their homes and are kicked out on the

Predatory Lending Practices

Based on my 32 years at the Atlanta Legal Aid Society, 12

years as director of the Home Defense Program, and
hundreds of sub prime lending cases that have come
through my program, I have never seen a sub prime
mortgage lender not engage in one or more of three distinct
categories of predatory lending practices. Here is what they

I. They overcharge on interest and points.

Predatory mortgage lenders charge egregiously high annual

interest and prepaid finance charges (points) which are not
justified by the risk involved because these loans are
collateralized by valuable real estate. Since these
companies only lend at 70-80% loan-to-value ratios, they
have a 20-30% cushion to protect them if they have to
foreclose. They usually buy in at the foreclosure auction
sale, evict the former homeowner, and sell the house for
enough to pay off the loan and often generate additional
profits. This assertion may be tested by ascertaining the net
profits sub prime mortgage lenders earn. If the risk were
great, losses would be high. High losses would be reflected
in diminished profits. In spite of this, profits in fact are

These profits are reflected in the trading values of these

lenders. For example, two years ago Ford Motor Company
sold its sub prime finance company subsidiary, Associates
Financial Services, to stockholders for $25.8 billion. First
Union purchased The Money Store for $2.1 billion. The CEO
of GreenTree Financial received $102 million in total
compensation for 1996 and $65 million in the previous year.
More recently, Bank of America offered NationsCredit, one of
its sub prime mortgage lending subsidiaries, for sale for $1
billion. “BOA Is Asking $1 Billion For NationsCredit Unit,”
National Mortgage News, May 15, 2000, p. 1. According to
the article, NationsCredit currently brings in $5 million per
month. EquiCredit, the other sub prime mortgage lending
subsidiary owned by Bank of America, makes $30 million per
month. In an article entitled "Loan Sharks, Inc.," Thomas
Goetz reports that:

Sub prime companies say their interest rates are so high to

compensate for the greater risk these borrowers bring. But a
welcome side effect of high rates is the profits that
traditional banks can't hope to match. According to Forbes,
sub prime consumer finance companies can enjoy returns up
to six times greater than those of the best-run banks.
Corporate America hasn't failed to notice.

Village Voice, July 15, 1997 at 33.

II. They perpetrate other profitable abuses.

Predatory mortgage lenders purposely engage in other

abusive lending practices that effectively allow the lenders to
collect hidden, indirect interest and thereby increase and
enhance profits.

Examples are:

• Loan flipping;
• Packing the loan with overpriced single premium-
financed credit life, disability and unemployment
• Balloon payments;
• High prepayment penalties;
• Using scam home improvement companies to generate
• Paying kickbacks to mortgage brokers to generate
originations; and
• Paying off low cost or forgivable mortgage loans.

It is crucial to understand that the profitability of the sub

prime mortgage lending business is derived not just from
overcharging on interest and points as set out in Category I,
but also from engaging in the above listed abusive lending
practices set out in Category II and Appendix A [of
the report]. The profitability is inextricably intertwined with
the perpetration of these abusive lending practices.

Moreover, in this instance the sub prime lenders cannot

legitimately argue that risk justifies their practices. While
the price of the loan product should be related to actual risk,
the abusive practices listed in Category II and Appendix A
have nothing to do with risk and cannot be justified on the
basis that many sub prime borrowers have less than perfect
credit ratings.
III. They target groups based on age, race, income,
and sex.

Predatory mortgage lenders purposely target vulnerable

elderly, minority, low and moderate income, and women
homeowners with high cost abusive mortgage loans.

Elderly homeowners, who tend to have substantial equity

but live on fixed incomes (social security and retirement
benefits), are perhaps the principal targets. Their homes
may be in need of expensive repairs (often roofing work) or
they may have fallen behind on their property taxes,
incurred substantial medical bills not covered by Medicare,
Medicaid or health insurance, or suffered a loss of income
after the death of a spouse. The common characteristics of
these victims are a need for money (either real or suggested
by the lender) combined with a lack of financial
sophistication, often exacerbated by diminished mental
capacity as a result of Alzheimer's and other dementia-
related diseases.

Minority groups are disproportionately targeted by predatory

lenders because their access to legitimate sources of loans
and other financial services is disproportionately denied.
Some banks and other conventional mortgage lenders
engage in redlining by designating entire communities as
bad financial risks and refusing to make them prime rate
loans. Redlining creates a credit vacuum filled by the
predatory lenders (many of which are owned by the same
banks which redline communities). These predators target
these same communities with overpriced loan products,
knowing that the residents are a captive market with no
access to reasonably-priced credit. This is called reverse

In Atlanta, sub prime loans are almost five times more likely
in black neighborhoods than in white neighborhoods. In
addition, homeowners in moderate-income black
neighborhoods are almost twice as likely as homeowners in
low-income white neighborhoods to have sub prime loans.
See HUD Report, “Unequal Burden in Atlanta: Income and
Racial Disparities in Sub prime Lending,” April 2000. See
also Appendix B, map of Atlanta metropolitan area showing a
high concentration of sub prime lenders’ market share of
refinancing loan originations in 1998 in minority census
tracts, and very low concentration in non-minority areas. By
comparison, see Appendix C, map of the Atlanta
metropolitan area showing a high concentration of Fannie
Mae and Freddie Mac support for the conventional (low cost,
non-abusive) home mortgage loan market in non-minority
neighborhoods, and a dearth of Fannie and Freddie support
for conventional mortgage lending in minority
neighborhoods. For similar findings of disparities in lending
based on race in Chicago, see “Two Steps Back: The Dual
Mortgage Market, Predatory Lending, and the Undoing of
Community Development,” Woodstock Institute, November
Low and moderate income homeowners are also targets
when they have or appear to have less than perfect credit
ratings. Conventional lenders tend to deny loans to these
individuals and often steer them to predatory lenders. In
Atlanta, sub prime loans are three times more likely in low-
income neighborhoods than in upper-income
neighborhoods. See HUD Report.

Finally, a disproportionate number of my clients are women.

Most of these are elderly, African American, and widowed. I
believe that in many instances women are targeted because
they are deemed by lenders to be vulnerable.

Expansion of Predatory Lending

Over the past 12 years, I have seen a dramatic increase in

the number of predatory mortgage loans in the Atlanta
area. The number of sub prime refinance loans originated in
Atlanta increased by more than 500% from 1993 to 1998.
See HUD Report, “Unequal Burden in Atlanta: Income and
Racial Disparities in Sub prime Lending,” April 2000. In
addition, the Atlanta metropolitan area saw a 232% increase
in the number of foreclosures by sub prime lenders, while
there was a 15% decrease in the number of foreclosures by
nonsub prime lenders. See HUD Report.

Examples of Cases

Examples of cases which have come into our office over the
last few years include the following. A 62-year old African
American widow borrowed $88,900 from a bank owned sub
prime lender with a 13% annual percentage rate (APR). The
$88,900 borrowed included approximately $10,000 in single
premiums for credit life, disability and unemployment
insurance coverage. The premiums were financed over the
term of the 15 year loan at 13% APR. The life insurance
provided coverage for only the first ten years of the loan
term. The disability insurance covered only the first five
years of the loan. Thus, the lender packed in $10,000 in
expensive credit insurance which dramatically increased the
balance and was financed over the term of the loan, though
actually covered less than the term of the loan.

Another client is a 71-year-old, retired African American long

time homeowner and her elderly, ill husband. They were
living in a paid for house when she answered a newspaper
advertisement offering home repairs which they needed.
The home improvement salesman arranged financing
through a bank-owned sub prime mortgage lender for the
$13,780.00 price for the home improvement work. The loan
was for $21,612.59, and included payoffs of some other
debts they owed. The APR was 10% and the term was 15
years. The home improvement company drew down a check
for $6,899.00, installed a hot water heater, and
disappeared. An expert valued the work performed at about
$500.00. When the homeowner complained to the mortgage
lender that the work had not been completed, the lender
mailed her a check for the remaining $6,890.00 made out to
her, her husband (who had since died), and the home
improvement company (which was long gone). Although
she cannot cash the check, she has continued to make the
payments on the mortgage. In this case, a sub prime lender
used a scam home improvement company to aid it in
generating a high cost sub prime mortgage loan.

An African American couple in their 40s purchased a home

with a $121,366.90 mortgage loan from a large national sub
prime lender (not bank owned). The prepaid finance charge
was $3,534.96. The APR was 14.39%. The loan had a
balloon payment provision requiring that $106,320.28 be
paid as the last payment on the 15-year mortgage.
Although the balloon feature was disclosed, the purchasers
did not know about it until six months after the loan closing,
when the lender called and told them about the balloon
feature, and suggested they come back in to obtain a new
loan without a balloon. Although they hesitated to do so at
first, they finally agreed to the refinancing to rid themselves
of the balloon payment requirement. The new loan was for
$133,583.37. The prepaid finance charge was $9,850.63.
The APR was 13.58%. The new loan was for a 30-year
term. In this case, the lender employed the balloon feature
to trigger a refinanced (or flipped) loan which included about
$10,000 in points.

I could provide dozens of other examples of high cost,

abusive mortgage lending cases. I have omitted the names
of the homeowners and lenders here because these cases
have either been settled or are in settlement discussions.

History and Role of the Banks in Predatory Lending

When I started at Atlanta Legal Aid Society almost 32 years

ago, the few abusive mortgage lending cases we saw
involved local individuals and companies. In the mid to late
1980s, national finance companies started getting into the
sub prime mortgage lending business, and we saw an
increase in the proliferation of abusive lending practices. In
the early 1990s to the present, other large national
corporations and national banks got involved in the sub
prime market. Ford Motor Company acquired the
Associates, a large sub prime mortgage lender. Chrysler
Motor Company created Chrysler First, Inc., a consumer
finance and second mortgage company.

Although most banks have played no role in the sub prime

lending business, some banks have played a very significant
role in the expansion of sub prime lending and the abusive
practices that are so much a part of it. That role is played
out in a number of different ways.

A few banks own sub prime mortgage companies. Banks

now control five of the nation’s top ten sub prime leaders.
Among the top 25 sub prime lenders in the third quarter of
1999, ten are owned by either a bank or thrift. A year ago,
just three of the top 25 were owned by depository
institutions. “Banks Take Over Sub prime,” National
Mortgage News, November 15, 1999, p.1.

The recent history of Bank of America is illustrative.

NationsBank acquired C&S National Bank which owned C&S
Family Credit. In November 1992, NationsBank Corporation
purchased Chrysler First. NationsBank combined C&S Family
Credit with Chrysler First and called the new company
NationsCredit. Later NationsBank acquired Barnett Bank
which owned a subsidiary, EquiCredit. NationsBank then
merged with Bank of America and is now known as Bank of
America. It engages in sub prime mortgage lending through
NationsCredit and EquiCredit.

Several years ago, First Union Bank purchased The Money

Store. Thus, First Union is now in the sub prime mortgage
lending business through The Money Store. CitiBank merged
with Travelers Insurance Company which owned Commercial
Credit. CitiBank, now known as CitiGroup, engages in sub
prime mortgage lending through CitiFinance (formerly
Commercial Credit).

We have numerous cases involving these bank-owned sub

prime entities. In these cases, we have seen countless
examples of abusive lending practices, including high
interest rate and points, loan flipping, home improvement
scams, credit insurance packing, high prepayment penalties,

Some banks make capital loans to support the operations of

sub prime mortgage companies. For example, 22 banks led
by First Union National Bank made an unsecured $850
million line of credit loan to now-defunct sub prime lender
United Companies Financial Corporation. Incidentally, those
banks lost at least $300 million on the deal. “Banks on
United Cos. Line Taking $300 Million Loss,” National
Mortgage News, April 5, 1999, p. 1. United is now in a
Chapter 11 bankruptcy. (The irony here is that most banks
will not make fully secured low cost mortgage loans to low
and moderate income homeowners with less than perfect
credit who need loans for legitimate purposes, such as to
replace a roof, and can repay the loan in full. These would
be profitable, fully secured loans. Apparently, the banks
involved with United felt an unsecured $850 million line of
credit to this company was a safe investment.)

Other banks support sub prime mortgage lenders by

purchasing mortgage loans originated by sub prime
mortgage companies or by acting as trustees in the
securitization process. For example, The New York Times
reported the following about Bankers Trust and sub prime
mortgage lender Delta Funding.
High-interest lending in poor neighborhoods has long
produced high profits for lenders and, often, equally high
burdens for homeowners. But the entry of big banks like
Bankers Trust is part of a growing trend in such lending and
has changed the equation.

Over the last several years, Delta has converted hundreds of

millions of dollars’ worth of its mortgages into securities
much like bonds, which it sells to investors through Bankers

In turn, Bankers Trust has provide Delta with hundreds of

millions of dollars from the investors, allowing it to make
more and more loans and become a major player in high-
interest lending in New York and in 21 other states.

But there is a problem: a high percentage of the

homeowners can’t afford Delta’s mortgages. Many say they
were duped into taking the loans and now may lose their
homes as Delta and Bankers Trust try to reclaim the money
for their investors.

“Suit Says Unscrupulous Lending Is Taking Homes From the

Poor,” The New York Times, January 18, 1999, p. 1.4

Banks face the same incentives as other lenders to take

advantage of sub prime borrowers. As a result, some banks
down stream potential customers to their sub prime
mortgage subsidiaries where they are subjected to high cost,
abusive mortgage lending practices. These include
mortgage loan applicants with less than perfect credit, as
well as minorities and others with good credit who are
steered downstream based on their race or national origin.

In addition, some banks engage in redlining practices. As

described above, redlining creates a credit vacuum which is
then filled by predatory lenders (many of which are owned
by the same banks).

The involvement of these banks has resulted in the

expansion of capital into the sub prime mortgage business,
which in turn has resulted in the expansion of sub prime
markets for the sub prime entities. The ultimate result is
that many more homeowners have been and continue to be
subjected to predatory lending practices, which puts them in
a position of struggling to make their mortgage payments,
with many eventually losing their homes to foreclosure.

I was handling predatory mortgage lending cases when the

banks first became involved in sub prime lending. I vividly
recall that when NationsBank purchased Chrysler First in
1992, the bank went out of its way to assure local
communities that alleged predatory mortgage lending
practices engaged in by Chrysler First would cease. In fact,
when asked about homeowner lawsuits that had been filed
against Chrysler First, a bank spokesman said that if “there
had been problems with prior business practices, this
acquisition may well be the most effective way to fix them.”
“Complaints Arise Over Finance Firm: Chrysler First Faces
Lawsuits, The Charlotte Observer, January 10, 1993, page
1A. See Appendix D for a copy of this news article.

Before these acquisitions, we had clients who had mortgages

with Chrysler First and EquiCredit where we saw abusive
practices. Since NationsBank (now Bank of America) took
over Chrysler First and EquiCredit, in my opinion the
problems have gotten worse. We have more clients and
more abusive practices in connection with these loans.

In sum, the involvement of these banks with sub prime

lending has been a devastating development in terms of the
expansion of abusive, predatory mortgage lending practices
in low and moderate income and minority communities.

I know why these banks got involved: profitability.

Remember that profitability is inextricably intertwined with
the Category II and Appendix A abusive lending practices
described above. I would argue that these banks use the
profits from the sub prime mortgage lending business to
keep the costs of their prime mortgage lending business at
the lowest possible levels. These banks target their low cost
mortgage loan products primarily into middle income and
wealthy, white homeowner communities and target their sub
prime, abusive mortgage loan products into low and
moderate income, minority homeowner communities. The
result is a shifting of home equity wealth out of the low and
moderate, minority neighborhoods into middle class and
wealthy, white neighborhoods.


The Entry of Fannie Mae and Freddie Mac into the Sub
prime Mortgage Lending Business

I have been greatly disappointed that the entry of many

prominent national banks into the sub prime mortgage
lending business has resulted not in reform, but in the
expansion of the abusive practices. The fact that these
banks are federally regulated has made little difference. So
far, the bank regulators have done little to stop the
overcharging on cost and the other abusive practices.

Now, to my dismay, Fannie Mae and Freddie Mac have

announced they are getting into the sub prime mortgage
lending business. This is their response to HUD’s mandate
that they expand their affordable housing goals into low and
moderate income, minority neighborhoods and rural
communities. Like the banks before them, Fannie and
Freddie claim that their involvement will effectuate positive
change and reform in the sub prime market. I beg to differ.
Freddie recently revealed that it has purchased 70 HOEPA
loans which are by definition very high cost mortgage loans.
“Freddie Makes Sub prime Moves,” National Mortgage News,
February 22, 2000.

If Fannie and Freddie get involved in the sub prime

mortgage lending business, I cannot see how the results
would be any different from the results of the banks’
involvement. The results most likely will be the same. In
fact, the results likely will be even worse because even more
capital will be infused into the sub prime business by Fannie
and Freddie than has been the case with the banks. As a
result, predatory mortgage lenders’ penetration into minority
communities with their poisonous, abusive, high cost
mortgage loan products will likewise greatly increase. I
would argue that Fannie and Freddie will use the profits from
the sub prime mortgage lending business to keep the costs
of their prime mortgage lending business at the lowest
possible levels, just as the banks have done. Again, in my
opinion, the result will be a shifting of home equity wealth
out of the low and moderate income, minority neighborhoods
into middle class and wealthy, white neighborhoods.

Some argue that Fannie and Freddie’s involvement in sub

prime lending will tend to eliminate the abusive lending
practices. Proponents cite their huge capital base and
uniform underwriting standards for the loans they purchase.
In theory, the potential for reform is great. However, the
promise of reform seems empty given recent developments.

In response to recent expressions of concern about Fannie

and Freddie getting into the sub prime mortgage lending
business, Fannie announced that it will not buy HOEPA loans,
mortgage loans where single premium credit life insurance
has been sold in connection with the loan, or mortgage loans
where the points and fees exceed 5% of the amount
borrowed. Fannie will only allow prepayment penalties
under certain circumstances. Freddie has announced that it
will not buy HOEPA loans or mortgage loans with single
premium credit insurance policies. Freddie also announced it
will not buy mortgage loans from companies that refuse to
report to the credit bureaus timely payments by borrowers.

Our concern is this: what about all the other abuses set out
and described in Category II and Appendix A? What about
loan flipping? Home improvement scams? Paying off low
cost and forgivable loans? I am certain that many if not
most of the companies would simply expand into these other
abuses because they are so closely tied to profitability, even
as they might stop the few practices prohibited by Fannie
and Freddie.

Why have Fannie and Freddie not undertaken policies to stop

all the abuses? Profitability. Fannie and Freddie are
beholden to their stockholders. Like other corporations, they
need to report increases in profits. Lately, the overall
volume of mortgages purchased by Fannie and Freddie has
been down. Getting into the sub prime lending business
would increase profits substantially, but prohibiting the
abusive practices would cause a substantial decrease in
profits. Thus, there would be tremendous pressure on
Fannie and Freddie not to prohibit the abuses.

There are other good reasons why Fannie and Freddie should
not enter the sub prime market. If Fannie and Freddie enter
the sub prime mortgage lending business, any downturn in
the economy would result in a massive increase in
foreclosures because one of the hallmarks of abusive lending
is setting the payments at amounts the borrowers can barely
afford. Fannie and Freddie, as government sponsored
enterprises, might very well turn to Congress for a financial
bailout, similar to the bailout of the savings and loan
industry in the 1980s which cost taxpayers billions of dollars.

Finally, entering into the sub prime mortgage lending

business may subject Fannie and Freddie to civil liability for
predatory mortgage lending practices. Just a few weeks
ago, homeowners filed a class action case against Lehman
Brothers for its involvement in alleged predatory lending
practices of First Alliance Mortgage Company. Fannie and
Freddie’s involvement in the sub prime mortgage lending
business with the inherent abuses similarly may result in
extensive litigation against both of them.


Non-Legislative Solutions

There is a non-regulatory, non-legislative solution to the

problem of predatory mortgage lending. The financial
services industry could easily agree to tear down the
artificial wall that has been erected between the A borrowers
and the B, C, and D borrowers. Lenders could make fairly
priced, profitable loans based on accurate analysis of risk.
They could also stop the abusive practices.

Models for this are emerging around the country. For

example, the Boston based Neighborhood Assistance
Corporation of America (NACA) has entered into a series of
innovative agreements with major national banks to provide
no cost, below market rate home purchase and refinance
mortgage loans (currently less than 8% fixed) to persons
who have less than perfect credit but have demonstrated an
ability to make current payments on their mortgages. The
program is a major success. Here the artificial wall was torn
down. The result has been that thousands of people who
formerly would have been denied access to low cost credit
are now enjoying the benefits of home ownership, and the
banks can take credit for positive community reinvestment.
This movement has culminated in NACA’s agreement with
Bank of America to provide $3 billion in home purchase and
refinance funds to low and moderate income persons with
less than perfect credit in 21 cities across America.
Unfortunately, despite the success of its program with NACA,
Bank of America continues to engage in sub prime, abusive
mortgage lending practices through its subsidiaries,
NationsCredit and EquiCredit. “The Two Sides of Lending:
Does NationsBank Play Good Cop and Bad Cop With
Borrowers?” U.S. News and World Report, December 9,
1996, p. 74.

Here is a suggestion. Banks and large private mortgage

companies could and should undertake a leadership role and
follow this example. They could expand their fairly priced,
non-abusive mortgage lending practices into the same
communities now suffering under the burden of predatory
mortgage lending. Banks with subsidiaries engaging in
predatory lending practices should cease those practices.
This expansion of conventional credit will lead to
competition, and result in lower costs and the elimination of
abuses, which would drive many of the predators out.

Regulatory and Legislative Solutions

Unfortunately, self-reform does not seem to be occurring.

Sub prime, predatory mortgage lending is expanding. Bank
of America, First Union, CitiGroup and others still operate
sub prime mortgage entities with the attendant overpricing
and abusive practices. Accordingly, legislative and
regulatory responses are desperately needed.

The trend toward prohibiting some but not all of the abusive
mortgage lending practices as a solution is grossly
insufficient. Lenders might very well refrain from the few
prohibited practices, but would simply expand into the
permissible abuses because they are so closely tied to
profitability. All the abuses must be stopped. It is simply
bad public policy to prohibit some egregious abuses but to
allow the others to flourish.

Therefore, I propose that the Home Ownership and Equity

Protection Act (HOEPA) should be amended in the following
ways. First, the interest rate and points and fees triggers
should be substantially lowered. Setting the triggers too
high allows lenders to set their rates just under the triggers
so they can engage in the prohibited practices. Second, all
of the abuses set out in Category II and Appendix A should
be prohibited.

In addition, HUD and/or Congress should require that Fannie

Mae and Freddie Mac expand their support for conventional
mortgage lending in minority and low and moderate income
communities, and prohibit them from entering into the
business of sub prime mortgage lending. Allowing Fannie
and Freddie to get into sub prime lending would enable
another explosion of predatory lending practices, which will
result in millions of homeowners struggling to make their
mortgage payments with many inevitably losing their homes
to foreclosure. Any assurance that their involvement will
lead to a decrease in predatory practices rings hollow. We
should learn from the history of the banks’ entry into sub
prime mortgage lending and the resulting damage inflicted
on our communities. As a matter of public policy, Fannie
and Freddie should not to get into this pernicious, predatory



This document describes the different ways that

mortgage lenders can trick homeowners into giving up
their homes.


Solicitations. Predatory mortgage lenders target low and

moderate income and minority neighborhoods for extensive
marketing. They advertise through direct mail, telephone
and door to door solicitations, flyers stuffed in mailboxes,
and highly visible signs in these neighborhoods. They
advertise on radio stations with a large minority audience
and employ television commercials that feature celebrity
athletes. Many companies deceptively tailor their
solicitations to resemble Social Security or other government
checks to prompt homeowners to open the envelopes and
otherwise deceive them about the transaction.

Home Improvement Scams. Predatory mortgage lenders

use local home improvement companies essentially as
mortgage brokers to solicit loan business. These companies
target homeowners and solicit them to execute home
improvement contracts. The company may originate a
mortgage loan to finance the home improvements and sell
the mortgage to a predatory mortgage lender, or steer the
homeowner directly to the predatory lender for financing of
the home improvements. There are many scams involving
home improvements.

With FHA Title 1 home improvement loans, sometimes the

contractor falsely claims that HUD will guarantee that the
work will be done properly and/or that HUD will pay for the
home improvements. In reality, HUD only guarantees to the
holder of the mortgage that HUD will pay the mortgage if the
homeowner defaults. HUD then pursues the homeowner for

The homeowners are often grossly overcharged for the work,

which the contractors often perform shoddily and fail to
complete as agreed. They sometimes damage the
homeowner's personal property in the process. In other
cases, the contractor fails to obtain required city or county
permits, thereby making sure that local code officials do not
inspect the work for compliance with local codes and do not
require that the shoddy work be corrected.
Some predatory mortgage lenders issue payments to the
home improvement contractor without ensuring that the
work has been properly completed according to the terms of
the contract. Some predatory mortgage lenders issue checks
payable solely to the contractor, thereby bypassing the

Some home improvement companies solicit home

improvement contracts with the intent to have the work
financed and immediately begin the work prior to the
expiration of the homeowner's three-day right to cancel the

Some home improvement contractors have the homeowner

sign a cash home improvement contract for an amount the
homeowner cannot afford in a lump sum. When the
contractor arranges financing with the predatory mortgage
lender and the homeowner objects to the terms of the
predatory loan, the contractor threatens to place a lien on
the property and sue the homeowner unless the homeowner
goes through with the financing.

Predatory mortgage lenders deny responsibility for the

overpriced, shoddy and incomplete work, even though they
previously arranged for these home improvement companies
to solicit loan business for them, and sometimes referred the
homeowner directly to the unscrupulous contractor.

Mortgage Broker's Fees and Kickbacks. Predatory

mortgage lenders also originate loans through local
mortgage lenders who act as "bird dogs", or finders for the
lenders. These brokers represent to the homeowners that
they are working for them to help them obtain the best
available loan, and the homeowners usually pay a broker's
fee. In fact, the brokers are working for predatory lenders,
who pay brokers kickbacks to refer borrowers to them.
Mortgage brokers steer borrowers to the lender who will pay
him or her the highest fee, not to the lender who will give
the borrower the lowest interest rate and fees. Without the
borrower's knowledge, the lender charges an interest rate
higher than that for which the borrower would otherwise
qualify in order to pass on to the borrower the cost of the
kickback. On loan closing documents, the industry uses
euphemisms or their abbreviations for these kickbacks: yield
spread premiums (YSP) and service release fees (SRF). The
industry also calls this bonus upselling or par-plus premium
pricing; we call it paying unlawful kickbacks.

Steering to High Rate Lenders. Banks and mortgage

companies steer customers with less than perfect credit to
high rate lenders, often a subsidiary or affiliate of the bank
or mortgage company. Some banks and mortgage
companies steer customers - especially minorities - who may
have good credit and would be eligible for a conventional
loan to high cost lenders. Sometimes the customer is
steered away even before completing a loan application.
Kickbacks or referral fees are paid as an incentive to steer
the customer to a higher rate loan. This practice of steering
these applicants to high rate lenders is called
downstreaming. On the other hand, when people with good
credit go to predatory mortgage lenders, the lender does not
upstream the applicant to a bank or conventional mortgage
company for a low cost mortgage loan.


Making Unaffordable Loans. Some predatory mortgage

lenders purposely structure loans with monthly payments
that they know the borrower cannot afford so that when the
homeowner is led inevitably to the point of default, she will
return to the lender to refinance the loan, and the lender can
impose additional points and fees. Other predatory mortgage
lenders, called hard lenders, intentionally structure the loans
with payments the homeowner cannot afford in order to lead
to foreclosure so that they may acquire the house and the
valuable equity in the house at a foreclosure sale.

Falsified or Fraudulent Applications. Some predatory

mortgage lenders knowingly make loans to unsophisticated
homeowners who do not have sufficient income to repay the
loan. Often such lenders plan to sell the loan on the
secondary market, especially through a process of
securitization. This process generally involves oversight and
due diligence by the purchaser to ensure that each borrower
appears to have sufficient income to repay the loan. Knowing
that these loan files may be reviewed at a later date by
subsequent purchasers, such lenders have the borrowers
sign a blank application form and then insert false
information on the form, claiming that the borrower has
employment income that she does not, so it appears that
she can make the payments.

Adding Inappropriate Cosigners. This is done to create

the false impression that the borrower can afford the
monthly payments, even though the lender is well aware
that the cosigner has no intention of contributing to the
payments. Often, the lender requires the homeowner to
transfer half ownership of the house to the cosigner. The
homeowner thereby loses half the ownership of the home
and is saddled with a loan she cannot afford to repay.

Incapacitated Homeowners. Some predatory lenders

make loans to homeowners who are clearly mentally
incapacitated. They take advantage of the fact that the
homeowner does not understand the nature of the
transaction or the papers that she signs. Because of her
incapacity, the homeowner does not understand that she has
a mortgage loan, does not make the payments, and is
subject to foreclosure and subsequent eviction.

Forgeries. Some predatory lenders forge loan documents.

In an ABC Prime Time Live news segment that aired April 23,
1997, a former employee of a high cost mortgage lender
reported that each of the lender's branch offices had a
"designated forger" whose job it was to forge documents.
Forgeries are used to refinance a customer into another high
cost mortgage with the same lender, to show apparent
approval for payouts to home improvement contractors
when the work is shoddy and/or incomplete, and to show
apparent approval for such charges as credit insurance

High Annual Interest Rates. Because the purpose of

engaging in predatory lending is to reap the benefit of high
profits, these lenders always charge extremely high interest
rates. This drastically increases the cost of borrowing for
homeowners, even though the lenders' risk is minimal or
nonexistent. Predatory lenders may charge rates of 10% and
more, substantially higher than the rates of 7% to 8% on
conventional mortgages.

High Points. Legitimate lenders charge discount points to

borrowers who wish to buy down the interest rate on the
loan. Predatory lenders charge high points, but offer no
corresponding reduction in the interest rate. These points
are imposed through prepaid finance charges (or points or
origination fees), which are usually 3% to 10%, but may be
as much as 20%, of the loan. The borrower does not pay
these points with cash at closing. Rather, the points are
always financed as part of the loan. This increases the
amount borrowed, which generates more actual interest to
the lender.

Balloon Payments. Predatory lenders frequently structure

loans so that the borrower's payments are applied primarily
to interest, and at the end of the loan period the borrower
still owes most or the entire principal amount borrowed. The
last payment balloons to an amount often equal to 85% or
so of the original principal amount of the loan. The
homeowner cannot afford to pay the balloon payment, and
either loses the home through foreclosure or is forced to
refinance with the same or another lender for an additional
term and additional points, fees, and closing costs.

Negative Amortization. This involves structuring the loan

so that interest is not amortized over the term. Instead, the
monthly payment is insufficient to pay off accrued interest
and the outstanding loan balance therefore increases each
month. At the end of the loan term, the borrower may owe
more than the amount originally borrowed. With negative
amortization, there will almost always be a balloon payment
at the end of the loan.

Credit Insurance - Insurance Packing. Predatory

mortgage lenders market and sell credit insurance as part of
their loans, often without the knowledge or consent of the
borrower. Typical insurance products sold in connection with
loans include credit life, credit disability, credit property, and
involuntary unemployment insurance, and debt cancellation
and suspension agreements. Lenders frequently charge
exorbitant premiums, which are not justified based on the
extremely low actual loss payouts. Frequently, credit
insurance is sold by an insurance company which is either a
subsidiary of the lender or which pays the lender substantial
commissions. They over-insure borrowers by providing
insurance for the total indebtedness, including principal and
interest, rather than merely the principal amount of the loan.
They also under-insure borrowers by providing insurance for
less than the outstanding principal balance and less than the
full term of the loan. In short, credit insurance becomes a
profit center for the lender and provides little or no benefit to
the borrower.

Padding Closing Costs. In this scheme, certain costs are

increased above their market value as a way of charging
higher interest rates. Examples include charging document
preparation fees of $350 or credit report fees of $300, which
are many times the actual cost.

Inflated Appraisal Costs. In most mortgage loan

transactions, the lender requires an appraisal. Most
appraisals include a detailed report of the condition of the
house, both interior and exterior, and prices of comparable
homes in the area. Others are "drive-by" appraisals, done by
someone simply looking at the outside of the house. The
former naturally costs more than the latter. However, in
some cases, borrowers are charged for a detailed appraisal,
when only a drive-by appraisal was done.

Inflated Appraisals. In order to make large loans,

predatory mortgage lenders arrange for appraisals that
inflate the true value of the house. The homeowner is then
stuck with the new mortgage, unable to sell the house or
refinance in the future because the mortgage balance
exceeds the true value of the home.

Padded Recording Fees. Mortgage transactions usually

require that documents be recorded at the local courthouse,
and state or local laws set the fees for recording the
documents. Predatory mortgage lenders often charge the
borrowers a recording fee in excess of the actual amount
established by law.

Increased interest rate after default. Some predatory

mortgage lenders make loans that allow the interest rate to
increase if the borrower defaults on the loan, which makes it
even more difficult for the homeowner to catch up the
payments when they recover from a temporary financial


Advance Payments from Loan Proceeds. Some

predatory mortgage lenders make loans in which more than
two monthly payments are consolidated and paid in advance
from the loan proceeds. The payments can be used to mask
a loan that is being made to a borrower who has no
reasonable prospect of paying the loan. By creating this
initial reserve of advance payments, the lender can use this
reserve to keep the loan current for a period and make the
loan appear justified. In addition, the lender's deducting
these payments from the loan proceeds gives the lender free
use of the borrower's money that the borrower is paying
interest on.

Bogus Mortgage Broker Fees. In some cases, predatory

lenders finance mortgage broker fees when the borrower
never met or knew of the broker. This is another way such
lenders increase the cost of the loan for their own benefit.

Unbundling. This is another way of padding costs by

breaking out and itemizing charges that are duplicative or
should be included under other charges. An example is
charging a loan origination fee (which should cover all costs
of initiating the loan) and then imposing separate, additional
charges for underwriting and loan preparation.

Prepayment Penalties and Fees. Predatory lenders often

impose exorbitant prepayment penalties. This is done in an
effort to lock the borrower into the predatory loan for as long
as possible by making it difficult for her to refinance the
mortgage or sell the home. For example, a homeowner has a
high cost mortgage loan with a balance of $132,000 which
she is unable to refinance at a lower rate because there is a
$6,200 prepayment penalty due at the end of her fifth year
paying this mortgage. Predatory mortgage lenders often
charge a fee for informing the borrower or a lender of the
balance due to pay off the existing mortgage loan. The loan
documents almost never authorize such a fee. These
practices provide back end interest for the lender if the
borrower does prepay the loan.

Mandatory Arbitration Clauses. Pre-dispute, mandatory,

binding arbitration clauses limit the rights of borrowers to
seek relief through the judicial process for any and all claims
and defenses the borrower may have against the mortgage
lender, mortgage broker, or other party involved in the loan
transaction. By inserting these clauses in the loan
documents, some lenders attempt to obtain an unfair
advantage by relegating their borrowers to a forum
perceived to be more favorable to the lender. This
perception exists because discovery is not a matter of right,
but is within the discretion of the arbitrator; the proceedings
are private; arbitrators need not give reasons for their
decisions or follow the law; a decision in any one case will
have no precedential value; judicial review is extremely
limited; and injunctive relief and punitive damages are not
available. Furthermore, the lender is not required to
arbitrate claims it may have against the borrower. If the
borrower defaults on the loan, the lender proceeds directly
to foreclosure.
Flipping. Loan flipping happens when mortgage lenders and
mortgage brokers aggressively try to persuade homeowners
to refinance repeatedly when the new loan does not have a
reasonable, tangible net benefit to the borrower considering
all the circumstances, including the terms of both the new
and refinanced loan, the cost of the new loan, and the
borrower's circumstances. Reduction of monthly payments
alone is not a tangible benefit to the borrower. Predatory
mortgage lenders and brokers hook the borrower into
refinancing by offering lower monthly payments and lower
interest, refinancing out from under a balloon payment or
variable rate mortgage, or by offering additional cash. Each
time the borrower refinances, the amount of the loan
increases to include additional origination fees, points, and
closing costs. Also, the term of the loan is extended. If the
loan amount is increased and the term is extended, the
borrower will pay much more interest than if the borrower
had kept the original loan. If the borrower actually needs
more money, it would be better if the lender made a second,
separate loan for the additional amount needed. A powerful
example of the exorbitant costs of flipping is the case of
Bennett Roberts, who had eleven loans from a high cost
mortgage lender within a period of four years. See Wall
Street Journal, April 23, 1997. Mr. Roberts was charged in
excess of $29,000 in fees and charges, including 10 points
on every financing, plus interest, to borrow less than
$26,000. The purpose of flipping is to keep the borrower in a
constant state of indebtedness. To paraphrase from the
famous Eagles' song, "Welcome to the Hotel California, you
can check in but you can never check out."

Recommending Default in connection with a

Refinance. Predatory mortgage lenders and brokers often
recommend or encourage the borrower to stop making
payments on their existing mortgage loan and other loans or
debts because they will refinance "soon." However, the
closing on the refinance is delayed and sometimes never
happens. If the refinancing occurs, the borrower feels
compelled to go through with the closing despite the high
interest rate, points, and fees and other abusive features of
the loan because the other creditors are demanding payment
on their loans, possibly threatening foreclosure or other legal
action. Also, the new lender charges an interest rate higher
than originally promised, and justifies the higher rate by
telling the borrower that their credit records now show no or
slow payments on their bills.

Modification or Deferral Fees. Some predatory mortgage

lenders charge borrowers a fee or other charge to modify,
renew, extend or amend a mortgage loan or to defer any
payment due under the terms of the mortgage loan, even
though the contract does not authorize such a fee.

Spurious Open End Mortgages. In order to avoid making

required disclosures to borrowers under the Truth in Lending
Act, many lenders are making "open-end" mortgage loans.
Although the loans are called "open-end" loans, in fact they
are not. Instead of creating a line of credit from which the
borrower may withdraw cash when needed, the lender
advances the full amount of the loan to the borrower at the
outset. The loans are non-amortizing, meaning that the
payments are interest only, so that the balance is never

Paying Off Low Interest Mortgages. A predatory lender

usually insists that its mortgage loan pay off the borrower's
existing low cost, purchase money mortgage. Instead of
lending the borrower only the amount he actually needs in a
second, separate loan, the lender makes a new loan paying
off the current mortgage. The homeowner loses the benefit
of the lower interest rate and ends up with a higher interest
rate and a principal amount that is much higher than

Paying Off Forgivable Loans and No-interest Loans.

Many low income homebuyers obtain down payment
assistance grants from state and local agencies. These
grants are made in the form of second mortgages that are
forgiven as long as the homebuyer remains in the home for
five or ten years. Other government programs allow low
income and elderly homeowners to obtain grants for
necessary home improvement work to bring homes up to
code standards. These grants are also made in the form of
mortgage loans that are forgiven as long as the homeowner
remains in possession of the home for five or ten years.
When many predatory mortgage lenders make loans to
these homeowners, they insist that these forgivable loans be
paid off (to increase the amount borrowed) even though
these loans would be forgiven in a matter of a few short
years. Habitat for Humanity provides home purchase
mortgage loans on which no interest is charged to low
income homebuyers. Predatory mortgage lenders have
targeted Habitat for Humanity homebuyers in Georgia and
North Carolina for high cost mortgage loans, offering "cash
out" loans to entice them and then requiring them to paying
off their no interest Habitat mortgage loans.


Shifting Unsecured Debt Into Mortgage. Mortgage

lenders badger homeowners with advertisements and
solicitations that tout the "benefits" of consolidating bills into
a mortgage loan. The lender fails to inform the borrower that
consolidating unsecured debt such as credit cards and
medical bills into a mortgage loan secured by the home is a
bad idea. If a person defaults on an unsecured debt, they do
not lose their home. If a homeowner rolls their unsecured
debt into their mortgage loan and default on their mortgage
payments, they can lose their home. Furthermore, since
unsecured debt generally is paid off between three and five
years, shifting unsecured debt into a mortgage loan extends
the payoff period to 15 to 30 years. Paying off unsecured
debt with a mortgage loan also necessarily increases closing
costs because they are often calculated on a percentage
basis, thereby increasing the loan balance. Whereas the old
total monthly household debt payments may in some cases
be less than the monthly payments on the new mortgage
loan, the monthly mortgage payments are often more than
the previous mortgage payments, thus exacerbating the risk
that the homeowner will lose the home to foreclosure.

Making Loans in Excess of 100% Loan to Value (LTV).

Some lenders are making loans to homeowners in amounts
that exceed the fair market value of the home. This makes it
very difficult for the homeowner to refinance the mortgage
or to sell the house to pay off the loan, thereby locking the
homeowner into a high cost loan. Normally, if a homeowner
goes into default and the lender forecloses on a loan, the
foreclosure sale generates enough money to pay off the
mortgage loan and the borrower is not subject to a
deficiency claim. However, where the loan is 125% LTV, a
foreclosure sale may not generate enough to pay off the
loan, and the lender may pursue the borrower for the


Force Placed Insurance. Lenders require homeowners to

carry homeowner's insurance, with the lender named as a
loss payee. Mortgage loan documents allow the lender to
force place insurance when the homeowner fails to maintain
the insurance, and to add the premium to the loan balance.
Some predatory lenders force place insurance even when the
homeowner has insurance and has provided proof of
insurance to the lender. The premiums for the force placed
insurance are frequently exorbitant. Often the insurance
carrier is a company affiliated with the lender, and the force
placed insurance is padded because it covers the lender for
risks or losses in excess of what the lender may require
under the terms of the loan.

Daily Interest When Payments Are Made After Due

Date. Most mortgage loans have grace periods, during which
a borrower may make the monthly payment after the due
date without incurring a late charge. The late charge often is
assessed as a percentage of the late payment. However,
many lenders also charge daily interest based on the
outstanding principal balance. While it may be proper for a
lender to charge daily interest when the loan so provides, it
is deceptive for a lender to charge a late fee as well as daily
interest when a borrower pays before the grace period

Late fees. Some predatory mortgage lenders charge

excessive late fees, such as 10% of the payment due.
Sometimes they charge this fee more than once for only one
late payment.


Abusive Collection Practices. In order to maximize
profits, predatory lenders either set the monthly payments
at a level the borrower can barely sustain or structure the
loan to trigger a default and a subsequent refinancing.
Adding insult to injury, the lenders use aggressive collection
tactics to ensure that the stream of income flows
uninterrupted. The collection departments call homeowners
at all hours of the day and night, including Saturday and
Sunday, send late payment notices (in some cases, even
when the lender has received timely payment or even before
the grace period expires), send telegrams, and even send
agents to hound homeowners, who are often elderly widows,
into making payments. These abusive collection tactics often
involve threats to evict the homeowners immediately, even
though lenders know they must first foreclose and follow
eviction procedures. The resulting impact on homeowners,
especially elderly homeowners, can be devastating.

High Prepayment Penalties. See description above. When

a borrower is in default and must pay the full balance due,
predatory lenders will often include the prepayment penalty
in the calculation of the balance due.

Flipping. See description above. When a borrower is in

default, predatory mortgage lenders often use this as an
opportunity to flip the homeowner into a new loan, thereby
incurring additional high costs and fees.

Call provision. Some predatory mortgage lenders make

loans with call provisions, which permit the holder of the
mortgage, in its sole discretion, to accelerate the
indebtedness, regardless of whether the borrower's
payments are current and the homeowner is otherwise in
compliance with the terms of the loan.

Foreclosure Abuses. These include persuading borrowers

to sign deeds in lieu of foreclosure, giving up all rights to
protections afforded under the foreclosure statute, sales of
the home at below market value, sales without the
opportunity to cure the default, and inadequate notice which
is either not sent or backdated. We have even seen cases of
"whispered foreclosures", in which persons conducting
foreclosure sales on courthouse steps have ducked around
the corner to avoid bidders so that the lender was assured
he would not be out-bid. Finally, foreclosure deeds have
been filed in courthouse deed records without a public
foreclosure sale.


There are many other things a freedom awakened

person can do to truly be free. For more information,
please call or email us.

Kenneth M. DeLashmutt
"Mortgage Debt Elimination Consultant"

Phone: 401-349-4717 EST

Email: educationcenter2000@cox.net
Website: www.educationcenter2000.com













PART 226)





LegalAid-GA.org provides information relating to the law and

legal resources in Georgia. Other states have different laws.
Therefore the information on LegalAid-GA.org may not apply
to your situation if you are from another state. To find
information and resources for other states, you may go to



Understanding the importance of breach of fiduciary duty in
a negligence case will help you understand whether the
complaint will be successful.

Breach of duty is part of a negligence lawsuit and the most

important aspect in proving such an issue. If no duty was
ever breached then no negligent damages are owed.
In a negligence lawsuit there are four elements to consider:
duty, breach of duty, causation and damages. For breach of
duty, it must be decided whether or not the defendant, the
one being accused of negligence, behaved in a way that a
reasonable person would have under similar circumstances.
If no duty is owed then there is no negligence lawsuit.

To determine breach of duty's existence, a determination is

made as to the standard of care and an evaluation of the
defendant's conduct in reflection of that determined
standard. If duty of care by the defendant can be proven,
using the reasonable care standard, then negligence can be
an issue. The defendant needs to have recognized the risks
created by her or his actions and to understand what could
happen from those risks taken. The general standard of care
is then applied to the specific circumstances of the situation
and the jury must establish whether the defendant's conduct
was negligent.

When the courts decide if duty was owed they consider the
objective or subjective standard. Objective standard
considers the defendant's actions against a hypothetical
reasonable person. With the subjective standard, the court
considers whether the tortfeasor, the person who is allegedly
negligent, believes her or his actions were reasonable. For
example, if someone attempts to rob an elderly woman in a
parking lot and she happens to have a gun and shoots her
attacker, the objective standard would ask if a reasonable
person would have acted the same way. In the subjective
standard the courts would ask the elderly woman if she
thought she was acting in a reasonable fashion.

Professionals are held to a higher standard of care than an

ordinary reasonable person would be. Police officers, for
example, must behave as a reasonable officer would do so
rather than a reasonable person. The perspective of an
officer would be different than an ordinary person and that
difference matters in the court.

Occasionally, statutes, or laws, will decide the reasonable

standard of care rather than the courts interpreting the
behavior. When statutes determine the standard of care
owed, violations would be called negligence per se.

If a plaintiff, the person alleging negligence, is unable to

prove the defendant's negligence because pertinent
information is inaccessible, then the plaintiff can rely on res
ipsa loquitur. What this means is that the act speaks for
itself and needs no other information to determine
negligence. But, in order to use this, the plaintiff must prove
two things: the event which injured themselves only
happens when negligence has occurred; the item or
instrument which caused the injury was under exclusive
control of the defendant and the plaintiff's injuries were not
due to their own actions.

The key factor to remember in considering negligence is

whether the duty of care was ever owed to the plaintiff, by
the defendant, and whether or not that duty was breached.


There are many other things a freedom awakened

person can do to truly be free. For more information,
please call or email us.

Kenneth M. DeLashmutt
"Mortgage Debt Elimination Consultant"

Phone: 401-349-4717 EST

Email: educationcenter2000@cox.net
Website: www.educationcenter2000.com

There are many other things a freedom awakened

person can do to truly be free. For more information,
please call or email us.